A burgeoning legal conflict between Chicago-area government and two outlying municipalities over sales tax revenue is focusing attention on a small industry of consultants who have acted as middlemen in a series of deals while working aggressively to deflect attention from themselves and their clients.
The consultants say their work is aboveboard and beneficial to the state, but they decline to identify their clients. At issue is whether their clients, which are companies doing business in the Chicago area, are acting appropriately in rerouting sales transactions to other towns in order to cut their sales tax bills.
As part of the dispute, the Regional Transportation Authority and a number of Chicago-area municipalities have found themselves in the unusual position of doing their own sleuthing in an effort to figure out where there may be diversions from their sales tax revenue stream. They have taken the unusual step of requesting financial information from rival taxing bodies under the state’s Freedom of Information Act, a maneuver more often associated with media probes.
The detective work has identified the outlines of some agreements but few of the underlying details. Last week, in an escalation of the conflict, the RTA and the city of Chicago filed suit against Kankakee and Channahon to try to force the release of more information and to challenge the towns’ sales-tax strategies. The suits also named several of the consultants, bringing their identities slightly out of the shadows.
Still, little is known about the middlemen and their clients, making it impossible, RTA officials said, to determine how much sales tax money is possibly being shifted from the Chicago area.
“The RTA, but more so the public, has a right to know where our tax dollars are going,” said Jordan Matyas, its deputy executive director. “This is our money being given away and they are hiding it.”
Illinois is among a handful of states where sales tax is applied where an offer is accepted, rather than where a product is delivered to the customer. That quirk in the law creates an opportunity for companies to relocate the site of sales transactions, typically by setting up a small satellite office.
With sales tax rates in the metro area running as high as 9.75 percent in Chicago, companies will look for lower tax rates elsewhere, said Jerry Roper, president and chief executive of the Chicagoland Chamber of Commerce. The rate is 6.25 percent in Kankakee and 7.25 percent in the Grundy County portion of Channahon.
Both those municipalities often provide rebates of a portion of the sales tax as well, and some big-name companies, from Lands’ End and Target to Aldi and Sears, have struck agreements. Frequently, larger corporations will use the tax breaks to lower their own procurement costs.
But the RTA and others remain in the dark about other companies that apparently work through middlemen.
In their lawsuits, the RTA and Chicago allege consultants have helped client companies route Chicago-area sales through sham offices in Kankakee and Channahon, and those suits seek to end the practice and refund lost tax revenue.
Scott Browdy, an attorney representing Inspired Development LLC, one of five consulting companies targeted in the RTA suit, said, “Our position is and always has been that these agreements are legal, above board, matters of public record for 10 years and every dime has been accounted for.”
And, he says, many of Inspired Development’s clients are Internet businesses that previously had no other presence in Illinois, so those are new taxes for the state. The state retains 5 percent of its 6.25 percent rate, with 1 percent going back to municipalities and 0.25 percent going to either the RTA in its region, or to counties.
Matyas, of the RTA, said, “They keep saying that but won’t give us the documents. Why should the public take their word when tax money is being given away?”
The RTA and other municipalities say they have been unable to get a full accounting, despite multiple requests under the Freedom of Information Act, known as FOIA. Their difficulties stem, at least in part, from the way the tax-incentive consulting industry operates.
In some cases, Kankakee and Channahon have inked agreements with consultants rather than individual retailers or other businesses. Those consultants, in turn, strike deals with client companies who want to channel their sales through remote offices in Kankakee and Channahon. Often, the consultants operate the bare-bones operations and share the tax rebates with their clients.
So far, the RTA and others have been unable to obtain any information about the consultants’ clients.
“If you are trying to determine if someone is declaring sales in the wrong city, then you would want to know who that store was,” said attorney Andy Greene, a partner with Chicago law firm Johnston Greene, which works with several governmental entities in Illinois that want to make sure they are collecting the appropriate share of taxes.
The firm filed FOIA requests with the city of Kankakee and the village of Channahon last year. Kankakee and Channahon produced some records but nothing that disclosed the identity of the consultants’ clients.
The law firm appealed to Attorney General Lisa Madigan, and her office asked the municipalities to provide copies of the withheld documents so a public access officer could review them and decide if they should be public.
The consultants were so adamant about keeping the identity of their clients confidential that they filed suit in Will County to try to block the municipalities from turning over the documents for review by the attorney general’s office. That case was dismissed last week, though the judge gave the plaintiffs the option of filing an amended complaint.
More Top Picks Best Sleep Earbuds For Everyday
“Tax-rebate client information is not public,” said Browdy, who represents consultants Inspired Development and Minority Development Co. LLC in that legal battle. “Cities don’t enter into agreements with those clients.”
Kankakee and Channahon officials say they are complying with FOIA law. And Channahon Mayor Joe Cook notes that those two cities are not the only ones that share sales tax revenue as a way to attract businesses. “We’re not the lone rangers,” he said.
The Tribune last week reported on another major example. American and United airlines, the two biggest carriers at Chicago’s O’Hare International Airport, route their jet fuel purchases through Sycamore, trimming as much as $12 million to $14 million off their annual tax bills in recent years.
For the most part, the consultants cited in the RTA lawsuit are very small, private firms. Mostly, they are keeping low profiles and scant information is available.
Browdy declined to provide any information about Inspired Development and its principal, Don Sloan.
Jerome Schain, an attorney for Minority Development, declined to comment, citing the pending litigation.
And attorney Susan M. Russell, who represents Corporate Funding Solutions LLC, a third firm named in the RTA lawsuit, did not respond to requests for comment.
A fourth firm, MTS Consulting LLC, has a website with some biographical information on its principals, David Porush, its CEO, and Benjamin Klein, its president. Porush is an attorney who formerly worked as a tax specialist at two major accounting firms, while Klein is a principal of Platinum Healthcare LLC, which provides back-office services for senior housing communities.
They declined to comment, through attorney Steven Blonder. Their website also lists Len Walter, business/financial editor for WBBM NewsRadio 780, as a consultant to the business. Blonder said Walter has not been involved for years.
Walter said he never had any involvement except lending his name as a favor to the firm’s former marketing director. The business news editor said he did not think the role presented a conflict of interest. “As a public individual, I can do what I want,” he said.
The fifth firm cited in the RTA suit is XYZ Sales Inc., led by tax expert James Kane, who is managing director of True Partners Consulting, a prominent accounting firm.
Kane, who is chairman of the Chicagoland Chamber of Commerce’s tax committee, spoke openly of his involvement, noting he set up about 10 firms during a transition time in his career in 2004, including about seven with sales tax-sharing agreements with Kankakee.
He set up the Kankakee businesses with the idea that the incentives might attract retailers who wanted to locate there. But, as it turns out, he focused his attention on helping get True Partners started, and the Kankakee companies were never active, he said.
“XYZ is dormant, nothing was ever paid to XYZ, ever,” he said. Its inclusion in the lawsuit is “baseless, unfounded and irresponsible,” he said.