Cook County Files Suit Against Kankakee and Channahon Alleging Sales Tax Kickback Scheme

The City of Chicago, Cook County and the RTA in Illinois filed a lawsuit against the city of Kankakee, the city of Channahon, and other parties, seeking damages due to an alleged kickback scheme among Kankakee, Channahon, brokers, and certain Chicago retailers to divert sales tax revenue from Chicago and Cook County. Chicago and Cook County alleged that Kankakee and Channahon attracted corporations and revenue by offering Illinois retailers kickbacks of sales tax revenue if they purport to process retail sales through small offices set up in those municipalities. The Illinois Legislature attempted to stop such kickback schemes in 2004 by passing a law prohibiting municipalities from entering into sales tax kickback agreements. Chicago and Cook County alleged that Kankakee and Channahon continued entering into kickback arrangements with retailers and concealing the arrangements behind third-party brokers who “accept” sales in Kankakee and Channahon on behalf of the retailers and serve as an intermediary for the kickbacks.

In Illinois, the location where a sale occurs for purposes of determining which local government receives the sales tax is generally presumed to be the location where the sale is “accepted” by the retailer. Beginning in 2000, in order to convince retailers to accept sales in their towns, Kankakee and Channahon began offering retailers kickbacks of up to 85% of sales tax revenue received from those retailers’ sales. As a result, several large retailers opened up small sales acceptance offices in Kankakee and Channahon and declared their retail sales as being accepted there. Since the retailers’ primary sales operations remain in Chicago and elsewhere, Kankakee and Channahon receive the sales tax revenue, while Chicago and other municipalities provide the services for the bulk of the retailers’ operations. Consequently, the Illinois Legislature passed the statute prohibiting sales tax kickback agreements, effective June 1, 2004. Certain retailers allegedly evaded the 2004 statute by hiding their identities using brokers as intermediaries. Chicago and Cook County allege that the undisclosed retailers are located in Chicago and/or deliver their retail products to customers from locations in Chicago. As such, their sales should be subject to Chicago sales tax. This case is pending in the Circuit Court of Cook County in Illinois. (Case No. 3426611CH, complaint filed October 3, 2011)

Posted on May 21, 2012