January 14, 2013 The Tax Man is Coming
Pop quiz what does United Airlines, American Airlines and actor Gerard Depardieu have in common? If you answered fled the jurisdiction to avoid paying the tax man you are correct. Fox News is reporting that several Chicago city agencies are suing United Airlines for unpaid sales tax. It works like this United Airlines has to buy gas just like anyone who drives a car. United Airlines also has to pay sales tax on that fuel, and when you’re talking about 1.2 billion in fuel sales even 7.5% sales tax looks like real money. Well in order to avoid that tax, United set up a company to buy the fuel and to buy it in a friendly jurisdiction. In this case United Airlines set up an office in Sycamore just outside of of Chicago. They pay the city $300,000 year for the office and the city exempts United from the tax. United likes this because their fuel tax is now about two one-hundredths of a percent and the city likes it because they get a free $300,000 per year added to their budget.
Now the City of Chicago feels like they are getting hosed to the tune of about Ninety Million dollars per year. Chicago can sue over this, but they probably will not win. Corporations and people have been making domicile decisions based on tax rates for years. In fact, most major corporations including United Airlines are tacitly based in Delaware. This is done in part for tax reasons. This is all perfectly legal. In fact most people I know have made decisions based on tax rates. I once went to Portland OR just to buy an iPad so I didn’t have to pay sales tax.
Chicago has really two options here either give up on the lawsuit or cut United Airlines a deal on sales tax.
What do you think Chicago will do?