Appeals panel: Chicago, Skokie OK to continue lawsuit vs Kankakee, Channahon over sales tax scheme

By Scott Holland | Oct 4, 2017

A state appeals panel has reversed a Cook County judge’s decision to dismiss a lawsuit in which Chicago and Skokie claimed Kankakee and Channahon ran schemes to divert into their treasuries tax revenue from out-of-state retailers.

In an opinion issued Sept. 29,  a three-justice panel of the First District Appellate Court reversed the ruling of Cook County Circuit Judge Peter Flynn. Justice Daniel J. Pierce wrote the opinion; Justices Sheldon A. Harris and John B. Simon concurred. In addition to the two municipalities named defendants included several corporate broker entities, including MTS Consulting LLC, Inspired Development LLC, Minority Development Company LLC, Corporate Funding Solutions and Capital Funding Solutions.

Chicago and Skokie said the broker defendants helped Kankakee and Channahon enter into sales tax rebate agreements allowing retailers to report to the state that online sales occurred in those communities when the customers were really outside Illinois. That resulted in Kankakee and Channahon collecting local sales tax as opposed to statutory use tax, which is a smaller amount, and also deprived Chicago and Skokie of what they contended should have been their rightful cut of the use tax revenue.

Chicago, along with Cook County and the Regional Transportation Authority, have separate actions against many of the same defendants over similar allegations, but this particular appeal concerns only the claims of Chicago and Skokie laid out in a third amended complaint they filed Dec. 13, 2013. Flynn had dismissed that complaint, saying they failed to state a claim.

Both the use tax and sales tax are 6.25 percent of an item’s purchase price. With sales tax, the state gets the first 5 percent and the municipality and county where the sale occurred collect the remaining 1.25 percent. With use tax, the 1.25 percent local portion is steered into a common fund from which the Illinois Department of Revenue makes disbursals — 20 percent to Chicago, 10 percent to the RTA, 0.06 percent to the Madison County Mass Transit District and $3.15 million to the Build Illinois Fund. Anything remaining goes to the state’s more than 200 municipalities based on their proportionate share of the state’s population.

The scheme allegedly involving Kankakee and Channahon dates to 2000.  The municipalities have been accused of convincing retailers — either directly or through the broker defendants — to declare sales as sourced to their communities in exchange for rebating a portion of the revenue.

The appellate panel struck an amicus brief of proposed internet retailer defendants, finding it did not provide unique perspective or information. It also said the plaintiffs were not seeking to re-tax the sales in question or impose a new liability on the retailers, but only “to disgorge the municipal defendants of an amount equal to the use tax revenue” they would have obtained had the sales been coded properly. Since those claims do not fall within the state law giving the Department of Revenue authority to assess, collect, remit or distribute sales tax or use tax, it is proper for the complaint to go through circuit court, the justices said.

The panel further said the circuit court erred in dismissing unjust enrichment claims from the third amended complaint and also abused its discretion by denying Chicago and Skokie leave to file a fourth amended complaint. That complaint, Pierce wrote, adequately asserted new unjust enrichment claims against the municipalities and the brokers, and should have been allowed to stand, because Chicago and Skokie sufficiently alleged the brokers “set up sham offices in the defendant municipalities and performed sham services” in order to get their cut of rebates.

The panel ordered the circuit court to reconsider the third complaint and allow the fourth amended complaint to move forward.

According to Cook County court records, the city of Kankakee has been represented by the firm of Eimer Stahl LLP, of Chicago, and the village of Channahon by the firm of Mahoney Silverman and Cross, of Joliet.

The city of Chicago and village of Skokie have been represented by their respective corporation counsel.

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Organizations in this Story

City of Chicago City of Kankakee Eimer Stahl LLP Village of Channahon Village of Skokie

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