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Cook County Judge dismissed sales tax diversion case involving Channahon, Kankakee

CHICAGO – A Cook County judge dismissed last week a 2011 lawsuit brought by the city of Chicago and the village of Skokie accusing Channahon, Kankakee and a number of client companies of wrongful diversion of sales tax dollars.

The lawsuit had alleged the companies would route Chicago-area sales through satellite offices in Kankakee and Channahon with lower sales tax rates, siphoning tens of millions of dollars from city and suburban taxing districts. Those municipalities would offer partial tax-rebate abatements to the companies in exchange for the offices locating there.

In a 20-page opinion issued Friday, Cook County Judge Peter Flynn wrote that Chicago’s attempt to seek relief from Channahon and Kankakee is outside of the city’s purview. Rather, authority to pursue the claims lies with the Illinois Department of Revenue, “which has primary jurisdiction over use tax redistribution claims such as these,” Flynn wrote.

John Holden, with the city’s law department, said Wednesday the city respectfully disagrees with the court’s decision.

“The crux of the decision was that Chicago and Skokie do not have standing to bring their claims,” Holden said in an email. “We are evaluating our next steps in response to the court’s decision, but intend to continue to pursue our claims.”

The suit sought refund of lost tax revenue.

In Illinois, sales taxes for years have been assessed where a sale is “accepted,” rather than where a customer receives the product. But the Illinois Supreme Court in 2013 tossed out those rules, prompting many companies once reliant on that taxing strategy to abandon low-taxing communities.

Flynn wrote that because those rules were tossed out, that left the plaintiffs only “with a claim for damages for past conduct.”

The judge ruled that the city of Chicago or the village of Skokie cannot bring the case back to court.

“To hold otherwise would subvert the Illinois sales and use tax system, empower an unwieldy and potentially disruptive form of municipal vigilante tax litigation, and undermine [if not outright undo] the careful balance struck by the General Assembly,” Flynn wrote in his 20-page opinion issued Friday.

Allowing one municipality to sue another to recover tax payments wrongly collected by the defendant is one thing, Flynn said, but empowering Chicago and 200-plus other home rule communities with the opportunity to “roam the state” as tax enforcement vigilantes, suing taxpayers, is another.

To allow that would “undercut the legislative allocation of tax collection and distribution to IDOR” and “would create an expensive, unworkable free-for-all,” Flynn wrote.

Channahon Mayor Missey Schumacher was not immediately available for comment Wednesday.

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