1 IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT – CHANCERY DIVISION The REGIONAL TRANSPORTATION AUTHORITY, ) an Illinois special purpose unit of government ) and municipal corporation, ) ) Plaintiff, ) ) vs. ) No. ) UNITED AVIATION FUELS CORPORATION, ) UNITED AIRLINES, INC., and THE CITY ) of SYCAMORE, an Illinois home rule ) municipality, ) ) Defendants. ) COMPLAINT FOR DECLARATORY JUDGMENT AND INJUNCTIVE RELIEF NOW COMES the REGIONAL TRANSPORTATION AUTHORITY, an Illinois special purpose unit of government and municipal corporation (“RTA” or “Plaintiff”), and for its causes of action against Defendants UNITED AVIATION FUELS CORPORATION (“United Fuels”), UNITED AIRLINES, INC. (“United Airlines”), and the City of Sycamore (“Sycamore”), states as follows: Introduction 1. This case is filed to redress the improper tax siting by Defendants of retail sale taxes on enormous sales of jet fuel. This practice, which has been ongoing since approximately 2001, has diverted tax monies from Plaintiff and other municipalities to Defendants. 2. Plaintiff seeks a declaratory judgment finding this practice improper, equitable relief enjoining this practice, a declaration that the Defendants’ various agreements allowing this practice are void, a constructive trust upon any monies held by Defendants which were obtained from this practice, and for the recovery of appropriate damages.
Transcript
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IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS
COUNTY DEPARTMENT – CHANCERY DIVISION
The REGIONAL TRANSPORTATION AUTHORITY, )
an Illinois special purpose unit of government )
and municipal corporation, )
)
Plaintiff, )
)
vs. ) No.
)
UNITED AVIATION FUELS CORPORATION, )
UNITED AIRLINES, INC., and THE CITY )
of SYCAMORE, an Illinois home rule )
municipality, )
)
Defendants. )
COMPLAINT FOR DECLARATORY JUDGMENT AND INJUNCTIVE RELIEF
NOW COMES the REGIONAL TRANSPORTATION AUTHORITY, an Illinois special purpose
unit of government and municipal corporation (“RTA” or “Plaintiff”), and for its causes of action
against Defendants UNITED AVIATION FUELS CORPORATION (“United Fuels”), UNITED AIRLINES,
INC. (“United Airlines”), and the City of Sycamore (“Sycamore”), states as follows:
Introduction
1. This case is filed to redress the improper tax siting by Defendants of retail sale
taxes on enormous sales of jet fuel. This practice, which has been ongoing since approximately
2001, has diverted tax monies from Plaintiff and other municipalities to Defendants.
2. Plaintiff seeks a declaratory judgment finding this practice improper, equitable
relief enjoining this practice, a declaration that the Defendants’ various agreements allowing this
practice are void, a constructive trust upon any monies held by Defendants which were obtained
from this practice, and for the recovery of appropriate damages.
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Parties, Venue and Jurisdiction
3. RTA is a special purpose unit of local government and municipal corporation
recognized under Illinois law. RTA’s primary responsibility is the financial and budget oversight
of the Chicago Transit Authority (CTA), the Commuter Rail Division of RTA (Metra), the Suburban
Bus Division of RTA (Pace), and regional transit planning issues. RTA is the third largest public
transportation system in North America, providing more than two million rides a day, and its
system covers 7,200 route miles in a six-county region that currently has a population of
approximately eight million people. Those counties are Cook, DuPage, Kane, Lake, McHenry,
and Will. CTA, Metra, and Pace depend upon tax revenues to support their operations.
4. United Fuels is a foreign corporation with its primary place of business in
Chicago, Illinois. United Fuels is a wholly-owned subsidiary of United Airlines.
5. United Airlines is a foreign corporation which transacts business in Illinois. Its
corporate headquarters and operations center are located in Chicago.
6. Sycamore is a home rule municipality of the State of Illinois.
7. Jurisdiction therefore exists under 735 ILCS 5/2-209 because the Defendants are
residents of, and/or transact business within, the State of Illinois.
8. Venue is proper in the Circuit Court of Cook County pursuant to 735 ILCS 5/2-
101, 5/2-102, and 5/2-103 because at least one Defendant resides in Cook County, because it is
the County where Defendants’ activity described herein has inflicted damage, and because it is
the County in which the transaction or some part thereof occurred out of which the causes of
action arose.
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Background Facts
United Airlines
9. United Airlines claims the most comprehensive global route network on the
planet. Its corporate headquarters and operations center are in Chicago, Illinois. United Airlines
also has subsidiary regional carriers, including United Express. Their combined operations
require large purchases of jet fuel.
10. United Airlines’ jet fuel purchases in Illinois are subject to retail sales taxes. This
suit concerns United Airlines’ use of its subsidiary, United Fuels, to improperly claim jet fuel sales
as taking place in Sycamore as opposed to Chicago, thus lowering United Airlines’ sales tax bill
based on the lower tax rate in Sycamore and the large amount rebated to United Fuels by
Sycamore of Sycamore’s local share of the sales tax.
Illinois Retail Sales Taxes
11. In Illinois, the “sales tax” is actually a combination of the companion Retailers’
Occupation and Use Taxes. 35 ILCS 120/1, et seq.
12. Illinois levies upon all retailers in the state a 6.25% sales tax pursuant to the
Retailers’ Occupation Tax Act. 35 ILCS 120. This tax is computed as a percentage of retail sales,
and, depending on where the sale takes place, local taxes in addition to the statewide tax may
be imposed (65 ILCS 5/8-11-1). These taxes may vary by local jurisdiction.
13. The Illinois Department of Revenue (“IDOR”) collects all of these taxes, and remits
to local government units their respective shares. In addition to the municipal tax that some
municipalities impose on sales, municipalities are entitled to a “Local Share” of the statewide
6.25% tax, which presently amounts to 1.0% of the sale price (35 ILCS 120/3).
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14. For instance, sales that take place in Chicago are currently subject to an overall
tax of 9.5% (6.25% state tax, 1.0% Cook County tax, 1.0 % RTA tax, and 1.25% Chicago tax).
However, sales that take place in Sycamore are currently subject to an overall tax of 8.0% (6.25%
state tax, and 1.75% Sycamore tax).
15. Thus, for every retail sale in Chicago, Chicago receives from IDOR 2.25% of the
sale price (the 1.25% Chicago tax plus Chicago’s 1.0% Local Share of the statewide tax). For
every retail sale in Sycamore, Sycamore receives 2.75% (the 1.75% Sycamore tax plus Sycamore’s
1.0% Local Share of the statewide tax).
16. For all sales in Cook County, RTA receives 1.25% of the sales price (the 1.0% RTA
imposed tax, plus .25% directly allocated from Cook’s share of the statewide tax). RTA receives
from the state an additional payment equal to 30% of its sales tax revenue as a Public
Transportation Fund (“PTF”) match on sales made in any of the six counties within the RTA
region. See e.g., 70 ILCS 3615/4.03.
17. In Illinois, the location where the “sale” occurs determines which local
governmental unit receives the tax on that sale. Thus, municipalities are highly motivated to
attract retailers to their towns to garner the resulting sales tax revenue.
18. Various statutes and regulations promulgated by IDOR determine the situs of a
sales transaction. See generally, 86 Ill. Adm. Code §§ 270.115 (Home Rule Municipal Retailers’
Occupation Tax), and 320.115 (Regional Transportation Authority Retailers’ Occupation Tax),
attached hereto as Group Exhibit A. A common understanding and sense to the reality of the
transaction is also appropriate in making sure that the intent of the law is carried out under
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particular factual circumstances. As shown below, the totality of the circumstances must be
considered in determining where the “sale” truly occurred.
19. For example, IDOR regulations specific to home rule municipalities (such as
Sycamore) and RTA state:
(a) The “Mere Solicitation of Orders” is not sufficient to demonstrate proof of doing
business in a given location. Specifically, “[f]or a seller to incur…Retailers’ Occupation
Tax liability…enough of the selling activity must occur within [a jurisdiction] to justify
concluding that the seller is engaged in business within [that jurisdiction] with
respect to that sale.” See, 86 Ill. Adm. Code §§ 270.115(a)(1); 320.115(a)(1) in Group
Exhibit A.
(b) While these regulations note the “seller’s acceptance of the purchase order or other
contracting action in the making of the sales contract is the most important single
factor in the occupation of selling,” and IDOR “will assume that the seller has
accepted the purchase order at the place of business at which the seller receives such
purchase order from the purchaser in the absence of clear proof to the contrary,” the
Department admits it cannot “…anticipate every kind of fact situation that may arise
in this connection,” and therefore, the above regulations are only to be used
generally. See, 86 Ill. Adm. Code §§ 270.115(b)(1), (2); 320.115(b)(1), (2) in Group
Exhibit A.
20. In sum, the statutes, regulations, and common sense at issue in this case
demonstrate: 1) some true substance of the transaction must have occurred in the jurisdiction
where the transaction is taxed; 2) the place of purchase order “acceptance” is not the sole
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controlling factor; 3) additional factors, including “other contracting action[s]” must be
considered; and 4) IDOR’s regulations cannot “anticipate every kind of fact situation that may
arise in this connection.” Accordingly, the “sales” in this case must be examined by the totality of
the circumstances.1
21. As described below, “acceptance” of the subject jet fuel sales does not truly occur
in Sycamore nor does United Fuels engage in sufficient sales activity in Sycamore to allow such
sales to be sited there for sales tax purposes.
Economic Development Agreement between Sycamore and United Fuels
22. In June 2001, Sycamore and United Fuels entered into an Economic Development
Agreement (“EDA”). See EDA, attached hereto as Exhibit B. The intent of the EDA for United
Fuels and United Airlines was to obtain a lower sales tax rate for jet fuel being purchased for
United Airlines and its regional carriers, including United Express. For Sycamore, the intent of
the EDA was to obtain tax revenue without burden. Under that EDA:
(a) United Fuels agreed to establish a business location within the corporate limits
of Sycamore;
(b) Sycamore and United Fuels agreed to share Sycamore’s portion of the Illinois
Retailer’s Occupation Tax and the City’s Home Rule Retailer’s Occupation Tax
under a contractually established formula; and
(c) The term of the EDA was ten (10) years.
1A case decided by the Third District Appellate Court this past year, Hartney Fuel Oil Co., found that the
tax situs test was single factor bright line test (i.e., the place of the purchase order acceptance). However,
the dissent in that case correctly concluded the test was a totality of the circumstances (or multi-factor)
test, as pleaded here. Hartney was a fact-specific case and is currently on a Petition for Leave to Appeal to
the Illinois Supreme Court. See Hartney Fuel Oil Co. v. Hamer, 2012 IL App (3d) 110144.
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23. The Sycamore City Council Agenda materials for June 4, 2001 (Exhibit C, pp. 8-9)
discuss the proposed agreement between Sycamore and United Fuels, stating in part:
“The attached agreement would establish an incentive for the United
Aviation Fuel Corporation, a subsidiary of United Airlines. The firm is
involved in the purchase of jet fuel, primarily for United’s O’Hare
operations.
“United Aviation proposes to locate a “call” center or “order acceptance”
center in Sycamore. The center would be a modest operation housing
several employees who would review, process, and approve purchase
orders and also process extensions of credit in connection with such sales.
An office suite of less than 1,000 square feet would be sufficient for the
operation. There will be no demand on public services for such a
business.
“Because of the nature of the firm’s business, a high volume of sales is
anticipated. Under Illinois law, sales are counted for taxation purposes at
the site where the order is accepted. This means that Sycamore would be
the recipient of a substantial increase in new state and home rule sales tax
revenue.
“Under the terms of the agreement, the City and the retailer would agree
for a period of ten years to share sales tax revenue from the firm’s
operations. The City would retain $300,000 in the first year, and could
realize up to a 3 percent increase per year for each of the next nine years,
depending on the fortunes of the retailer. The City would never make less
than $300,000 in new sales tax revenue from the firm’s operation in any
year that the agreement is in force. Given the possibility of an annual
increase of up to 3 percent per year, the City’s potential revenue from the
firm’s call center might reach $3,439,164.”
24. The minutes for the meeting of the Sycamore City Council meeting on June 4,
2001, (Exhibit C, pp. 2-3) show that the city ordinance to authorize execution of the EDA was
approved, and the following comments were made at the meeting:
“City Administrator Nicklas explained that this was an incentive proposal
for United Aviation Fuel Corporation, a subsidiary of United Airlines, to
locate an order acceptance facility in the City of Sycamore. Mr. Nicklas
said that this would be a modest operation housing several employees in
an office suite of less than 1,000 square feet, placing no demand on city
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services. Under the terms of the agreement, the City and the retailer
would agree for a period of ten years to share sales tax revenue from the
firm’s operations. The City would retain $300,000 in the first year, and
could realize up to a 3 percent increase per year for each of the next nine
years. Mr. Nicklas stated that such an infusion of sales tax was welcome
and suggested this money should be used for capital purposes rather
than operations. Mr. Nicklas recommended this heard on first reading
only.”
25. The EDA between Sycamore and United Fuels was amended on May 30, 2003.
See Amendment to EDA, attached hereto as Exhibit D. Under that amendment, certain changes
were made to the existing EDA, including an amendment to the monthly distributions of the
City’s portion of Illinois Retailers’ Occupation Tax and the City’s Home Rule Retailer’s Occupation
Tax, and the term of the agreement was extended to 25 years. It further contained a provision
stating that the retailer would at all times “comply with the terms and provisions of any and all
applicable statutes and regulations issued by the Illinois Department of Revenue.” See Exhibit D,
Para. 8.
26. A copy of the minutes of the Sycamore City Council approving the amendment is
attached as Exhibit E.
27. The subject EDA, as amended, is in force today.
28. Sycamore also has a similar contract with American Airlines and American
Aviation Supply, LLC.
United Fuels’ Operations and Improper Tax Reporting
29. The primary purpose of United Fuels is purportedly to buy fuel for use by United
Airlines and its regional carriers, including, but not limited to, United Express. It may also sell jet
fuel to other airlines, most likely those in the Star Alliance network and other worldwide partners
of United. On information and belief, United Airlines controls the activities of United Fuels.
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30. As alleged above, United Fuels is a wholly owned subsidiary of United Airlines.
The directors and officers of United Airlines are also senior officers and/or directors of United
Fuels, demonstrating they owe a fiduciary duty to both entities. Records from the Illinois
Secretary of State Corporate Database show the Officers of United Fuels and United Airlines are
located at 77 West Wacker Drive, Chicago.
31. While United Fuels purports to have a “sales office” in Sycamore, there is no
selling activity to demonstrate this office is the site of any sale compared to the activity United
Fuels and United Airlines perform in their primary offices in Chicago.
32. The United Fuels’ “sales office” at 1101 Dekalb Avenue, Sycamore, is located
within a small office building, accessible through the rear of the building. The office is located
on one floor, and shares that floor with other businesses. It is staffed by one person, but not on
a daily basis, and that sole representative does not even have a computer. Copies of pictures of
the office building and shared office entrance are attached as Exhibit F.
33. The only reason that United Fuels has an office in Sycamore is to attempt to
create a sham tax situs for fuel sales in a lower taxing jurisdiction. On information and belief, the
only “sales activity” of United Fuels which occurs in Sycamore is the purported receipt of fuel
purchase orders. All true sales activity occurs in Chicago: negotiations for the purchase of fuel
from vendors, all delivery scheduling, all accounting, credit approvals, and all decision-making
and support for United Fuels’ activities.
34. On information and belief, United Fuels formalizes the above activity by entering
into master fuel agreements (“Fuel Agreements”) to “sell” jet fuel to United Airlines and its
regional carriers. These Fuel Agreements set forth the terms and conditions for these purchases.
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All of the terms and conditions of the Fuel Agreements for the purchase of such jet fuel are
established in Chicago, not Sycamore.
35. On information and belief, United and United Express send periodic purchase
orders incorporating the terms and conditions of the Fuel Agreements to the United Fuels “sales
office” in Sycamore. These purchase orders specify the amount of fuel to be “purchased” for the
period. United Fuels purportedly “accepts” the offer in Sycamore and claims that the “sale” of
jet fuel took place in Sycamore.
36. The facts at issue demonstrate no true acceptance of a purchase order takes
place in Sycamore. The terms and conditions of the Fuel Agreements and other transactions are
established and accepted in Chicago with the knowledge and understanding that purchase
orders will be transmitted to an often empty office in Sycamore. Acceptance occurs before the
purchase order arrives in Sycamore as the transaction was already agreed upon in Chicago.
37. Plaintiff further asks this Court to apply a “totality of the circumstances” test to
these transactions.
38. IDOR has observed that when order acceptance activity takes place in more than
one jurisdiction, the facts and circumstances surrounding the sale must be carefully scrutinized
to assure that “enough” of the acceptance activity has occurred in the home rule municipality to
justify the conclusion that the sale took place there.
39. Applying the “totality of the circumstances” test to the facts at issue, the sales of
jet fuel in this Complaint are occurring in Chicago, not Sycamore.
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40. By improperly siting the said jet fuel sales to Sycamore, United Fuels pays the
lower combined sales tax rate which applies in Sycamore – 8% - compared to Chicago’s
combined sales rate – 9.5%.
41. In addition, United Fuels receives the sales tax kickback provided for in the EDA
from Sycamore, thus reducing the effective sales tax rate it pays even lower.
42. As a direct result, RTA has suffered and is suffering a loss of retail sales tax
revenues it should receive from the jet fuel sales of United Fuels, plus a loss of the 30% of its
sales tax revenue as a Public Transportation Fund (“PTF”) match on sales made in any of the six
counties within the RTA region.
43. Other municipalities are likewise suffering a loss of sales tax revenues as a result
of United Fuels’ retail sales tax practices described herein.
44. Unless these practices are enjoined, the tax losses to RTA and others will
continue.
COUNT I
CLAIM FOR DECLARATORY AND INJUNCTIVE RELIEF –
DEFENDANTS USE IMPROPER SALES SITUS
Plaintiff v. United Fuels and City of Sycamore
45. Plaintiff repeats and realleges paragraphs 1 – 44 above as paragraphs 1 – 44 of
this Count I.
46. After the EDA was signed in June 2001, United Fuels has made and continues to
make purported sales of jet fuel to United Airlines out of its “sales office” in Sycamore.
47. As a result of these sales, United Fuels paid Retailers’ Occupation Taxes to the
State of Illinois, which, in turn, distributes those proceeds to Sycamore, as the alleged situs of
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the sale. Under the EDA between Sycamore and United Fuels, United Fuels receives a significant
portion of Sycamore’s sales tax proceeds for nothing more than locating its “sales office” there.
48. United Fuels has an obligation under IDOR regulations to site these sales to
Chicago, not Sycamore. Without this proper siting of sales, Sycamore, together with United
Fuels, wrongfully acquired and still continue to wrongfully acquire sales tax revenue for their
own use and benefit and have deprived Plaintiff of the use and benefit thereof. It would be
unjust for these Defendants to retain Plaintiff’s sales tax revenue.
49. An actual controversy exists between Plaintiff, on the one hand, and United Fuels
and Sycamore, on the other hand, and therefore by the terms and provisions of 735 ILCS 5/2-
701 of the Illinois Code of Civil Procedure, this Court is vested with the power to declare the
rights and liabilities of the parties hereto and to give such other and further relief as may be
necessary proper.
50. Plaintiff has a protectable interest and clearly ascertainable right to not have its
tax monies unlawfully diverted from it.
WHEREFORE, the Plaintiff, REGIONAL TRANSPORTATION AUTHORITY, prays this Court:
(a) find and declare that United Fuels sales of jet fuel to United Airlines and United
Express are properly sited to Chicago;
(b) enjoin United Fuels from siting said sales of jet fuel to Sycamore;
(c) mandatorily enjoin United Fuels to site sales of jet fuel to Chicago;
(d) impose a constructive trust in an amount equal to all sales tax revenue received
and retained by Sycamore and United Fuels as a result of the EDA and/or Fuel Agreements,
