The Regional Transportation Authority (RTA) of northeastern Illinois filed a lawsuit Monday in Cook County Circuit Court against Chicago-based United Airlines, alleging that the carrier is operating a “sham” fuel purchasing office in the DeKalb County community of Sycamore to avoid higher sales taxes in Cook County.
At the center of the lawsuit is the United Airlines Fuel Corp. office in a strip mall in Sycamore, a small town 60 miles west of Chicago. According to the RTA, United claims to purchase jet fuel – one of the airline’s largest expenses – from the office.
The RTA alleges that American Airlines also dodges paying sales taxes in Cook County through a similar operation in Sycamore, but American was not named in the lawsuit filed Monday because the company is in bankruptcy proceedings.
The RTA – which oversees the Chicago Transit Authority (CTA), the Metra commuter rail system that serves suburban Chicago, and the Pace suburban bus service – contends that the United and American offices in Sycamore are rarely occupied and that one of the offices does not even have a computer.
The RTA says the airlines have avoided paying nearly $300 million in sales taxes through the use of the offices over the past seven years, costing the transportation authority $96 million in revenue.
“Governments across the country have been forced to do more with less,” RTA Executive Director Joe Costello said. “CTA, Metra, and Pace have had to work with constrained budgets and have needed to raise fares and reduce service because the money’s just not there. Now we know why.”
While sales tax in most states is collected where goods are received (in this case the fuel goes to O’Hare International Airport in Cook County), Illinois law allows companies to pay sales tax where the purchase is “accepted.” The sales tax rate in Cook County is 9.5 percent, while the rate in DeKalb County is 8 percent.
“These airlines happily accept taxpayer-supported services – like the mass transit that many of their customers and employees use – but don’t pay what is due to support those services,” Costello said. “That is just wrong.”
United and American have made 25-year agreements with Sycamore, which – according to the RTA – guarantees the town up to $500,000 per year in revenue in return for the airlines being allowed to “accept” fuel there. The agreements further allow the airlines to recoup most of the sales tax paid, amounting to as much as $14 million per year.
“RTA is charged with ensuring the financial stability of mass transit in the region and with ensuring that CTA, Metra, and Pace receive all revenue that they are entitled to,” Costello said. “We are calling on United, American, and any other businesses engaged in these practices to do the right thing and cancel these agreements.”
For the third quarter of 2012 – the most recent financial information available – United reported income of $9.9 billion. The company reported a $520 million profit in the quarter. Fourth quarter revenue and profits will not be announced until later this month, and those figures will be impacted by lost revenue due to Superstorm Sandy.
United spent $3.4 billion on aircraft fuel in the third quarter of last year, representing its largest single expense (salaries was second at $2 billion). Thus, anything that increases the cost of fuel, including having to pay higher sales tax to acquire it, could mean the difference between a quarterly profit and a quarterly loss. To combat increased fuel expenses, the company either would need to cut costs elsewhere (such as salaries) or somehow increase revenue through passenger fees or rate hikes.