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The Associated Press August 23, 2011, 3:32PM ET

RTA sues over tax-avoidance efforts

The Regional Transportation Authority and city of Chicago filed lawsuits Tuesday against two northeastern Illinois communities, alleging the entities are owed millions in lost revenue because the towns engage in tax-incentive programs that divert sales tax revenues.

The lawsuits against Kankakee and Channahon came after the Chicago Tribune reported that dozens of businesses in the Chicago area are moving purchases through satellite locations in outlying towns to gain a sales-tax advantage over their competitors.

RTA's executive director Joe Costello said the RTA system -- which oversees three Chicago area mass transit agencies -- relies on sales tax revenue for almost half of its funding. According to the lawsuit, RTA is allegedly owed at least $100 million in lost revenue.

"It is this funding that keeps our trains and buses running and in good repair," Costello said in a statement. "We believe that these illegal tax avoidance scams are costing our riders tens of millions in lost revenues every year."

The Tribune reported Sunday that catalog houses, appliance retailers and other companies have set up offices in places such as Kankakee and Channahon, which have lower sales taxes than Chicago. The retailers can charge customers a lower price, gaining a competitive advantage and offering a windfall to the host cities.

It's a strategy that has come to light over the past decade and has been aided by consultants who help the companies set up offices that are sometimes not much more than storefronts, the Tribune reported. The communities say they're following the state tax code in competing for the few tax dollars available. Some even offer rebates to incoming businesses. Kankakee reported paying companies $125 million in sales tax rebates from 2002 to 2010, according to the newspaper.

That amount could be double or triple in a city with a higher sales tax. Kankakee charges the state minimum, 6.25 percent, of which the state shares 1 percent with municipalities. Chicago's rate is 9.75 percent, meaning millions of dollars in lost revenue at a crucial economic time.

Chicago Mayor Rahm Emanuel called it a tax kickback scheme; the city's lawsuit also names three brokers.

"Companies are gaming the system and cheating Chicago's taxpayers," Emanuel said in a statement. "I have to be the voice for the taxpayers and I will not tolerate this."

Costello contended that the lawsuit is about fairness. Although Kankakee and Channahon are outside of RTA's region, officials with the agency say the Chicago-area businesses have employees who use the RTA's system and the companies should pay their fair share of taxes to support transit. The RTA oversees the Chicago Transit Authority, Metra and Pace.

Kankakee Mayor Nina Epstein declined to comment on the lawsuit Tuesday because she hadn't seen it. But she said several companies in Kankakee don't have other locations in Illinois, so the community is helping bring business to the state. She said any companies set up in Kankakee follow state regulation and are regularly audited.

"We're a little surprised that these are coming into question," Epstein said.

Channahon officials declined to comment specifically on the lawsuit Monday, according to a news release.

"We welcome the opportunity to speak with the Mayor of Chicago about this important issue," the news release said. "We find it surprising that the third largest city in the country would like to file a lawsuit against a small community of 13,000 whose annual budget is less than 1/2 of 1 percent of Chicago's annual budget."

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