The Regional Transportation Authority is accusing United Airlines and American Airlines with running "sham business operations" that have deprived Chicago and Cook County taxpayers and public transportation agencies of nearly $300 million over the last seven years, the agency said today.
The RTA alleges that United Airlines and American Airlines operate offices in Sycamore, Ill., that they use to avoid paying higher taxes that would ordinarily be owed from their offices in Chicago. These small, part-time offices are rarely occupied and, in at least one case, don't appear to even have a computer, the RTA said.
Both airlines claim they purchase their jet fuel, one of their largest expenses, from those offices, the RTA charged.
The RTA said it filed suit in Cook County Circuit Court against Chicago-based United, while deferring formal action against American, because American is currently involved in bankruptcy proceedings.
Both airlines said their tax arrangements are legal under Illinois law.
"The operation of our fuel subsidiary in Sycamore has been examined by tax authorities in the past and has been determined to comply with all applicable laws," United said in a statement. "We will vigorously defend ourselves against any such claims."
American declined to comment on pending litigation.
Sycamore Mayor Ken Mundy said the city has not seen the lawsuit, and he referred questions to City Manager Brian Gregory. Gregory could not be reached for comment.
"Governments across the country have been forced to do more with less. CTA, Metra and Pace have had to work with constrained budgets and have needed to raise fares and reduce service because the money's just not there. Now we know why," RTA Executive Director Joe Costello said in a news release. "These airlines happily accept taxpayer-supported services – like the mass transit that many of their customers and employees use – but don't pay what is due to support those services. That is just wrong."
The agencies overseen by the RTA, the CTA, Metra and Pace, rely on sales tax revenues to operate mass transit in the six-county region. Mass transit has been continually underfunded and, as a result, each agency has been forced to raise fares and cut services.
According to the RTA, both airlines purchase and use millions of gallons of jet fuel in Chicago. Despite this, since 2001, United has claimed to "accept" jet fuel at its office in a Sycamore strip mall, while American has been "accepting" jet fuel at its small, windowless office inside Sycamore's town hall since 2004.
The RTA alleged that the companies have entered into 25-year agreements with Sycamore, guaranteeing the city as much as $500,000 a year so that the airlines are allowed to claim that they "accept" jet fuel there. Most states collect sales tax based on where products are received while Illinois is one of only a few states that collect sales tax based on where a company claims a purchase was "accepted."
The RTA said that if the airlines complied with Illinois law and paid the appropriate sales tax, they would be taxed at a rate of 9.5 percent. Instead, the airlines claim to "accept" the fuel in Sycamore, where the sales tax rate is only eight percent, of which 2.75 percent goes back to the municipality. Sycamore then kicks back a large part of its share of the sales tax to the airlines, amounting to as much as $14 million a year, the RTA contends.
Previously, the RTA has filed similar lawsuits against Kankakee and Channahon, which have similar tax-avoidance deals with retailers and other airlines.
"RTA is charged with ensuring the financial stability of mass transit in the region and with ensuring that CTA, Metra and Pace receive all revenue that they are entitled to," Costello said. "We are calling on United, American and any other businesses engaged in these practices to do the right thing and cancel these agreements."
kbergen@ tribune.com, rwronski@tribune.com
Twitter: @kathy_bergen, @RichWronski
RTA: United, American running 'sham' operations to avoid taxes
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