Is this town the Luxembourg of Illinois sales tax?

The city of Kankakee, Ill.: A tax haven?

The Chicago area’s public transit agency says it’s been bilked of hundreds of millions of dollars over the last 15 years, a penny or two at a time. The culprits: towns in outlying parts of Illinois. Like Kankakee, population 27,000. Channohan, population 13,000. Sycamore, population 17,000. The agency says dozens of companies, including Target, AT&T and American Airlines, have used the towns as tax havens.

MTS consulting keeps an office in a faceless little building off Schuyler Avenue in Kankakee, about an hour south of Chicago. When no one answers, I look in the mail slot. No lights are on. A desk is visible, but no computer or phone. Later, MTS CEO David Polush tells me both are just out of view.

Down the hall, I ask a woman at Pinnacle Opportunities about MTS: Have you ever met anybody who’s been there?

"I haven’t. Sorry."  She's been working there for more than a year.

 In a court filing, Chicago’s Regional Transportation Authority says MTS records significant sales here, on behalf of clients based in the Chicago area. It’s one of several companies with offices like this in towns like Kankakee.

They’re here to save on sales tax. Illinois sets a statewide sales tax, but in Chicago the tax is higher because it adds levies for the city, the county and the RTA.

Carol Portman, executive director of the Illinois Taxpayers Federation, says peculiarities in Illinois sales tax law forced the Department of Revenue to write rules about where sales take place. "In some instances," she says, "it led to some rather unexpected results."

That is, some companies have been able to run their business one place— like Chicago— but, for tax purposes, book their sales someplace with a lower rate— like Kankakee. In some cases, it’s consultants like MTS that book the sales.

Additionally, towns like Kankakee offer an extra incentive to companies. Under state law, Kankakee gets a penny of the sales tax it collects— and the village gives 85 percent of that penny back to these companies.

The remaining sliver adds up to $2.5 million dollars a year for Kankakee. Ten percent of the village’s budget.

Portman sees nothing unusual about the arrangement. "That really isn’t any different from the income tax credits, or the property tax abatements that we’re giving people to come here," she says.

For instance, Boeing got tens of millions of dollars in city and state tax breaks when it moved its headquarters from Seattle to Chicago in 2001.

Jordan Matyas, the RTA's chief of staff, sees things differently. He’s suing companies like MTS and towns like Kankakee.

He says there are reasons companies base their operations in Chicago: Amenities like transit make it easier for them to do business.

"If they want to move somewhere else that has less resources, that’s their decision," he says. "But as long as they’re taking advantage of all our government services, they need to be paying the appropriate sales tax."

Kankakee’s mayor, Nina Epstein, makes no apologies.  "There are other parts of the state than the RTA district," she says.

Epstein says some of these companies don’t have Chicago offices at all. Some are Internet companies with no other physical presence in the state. Others simply don’t need full time staff to fulfill orders.

"This has helped fund police and fire services, public works," she says. "But now, it’s going to be taken away."

Last fall, the Illinois Supreme Court ordered a rewrite of tax regulation, to eliminate some of these arrangements.  That’s underway.

Meanwhile, some companies have ended their presence in Kankakee, and Epstein has zeroed out income from the tax deals for her next budget.

Tax expert Carol Portman says this is how tax policy works:  There are winners and losers.

"It’s easy for someone like the RTA to feel like they’ve been the loser and they want changes that make them the winner," she says. "But the problem is: There’s a loser then."

About the author

Dan is a sustainability reporter for Marketplace.

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