CHICAGO — A transportation agency filed a lawsuit on Monday alleging that United Airlines is falsely claiming to buy huge amounts of jet fuel out of a small rural Illinois office that doesn’t even have a computer in order to avoid paying tens of millions of dollars in taxes in Chicago, where the company is allegedly making the purchases.
The Regional Transportation Authority alleges United Aviation Fuels Corp., a subsidiary of United Airlines, has operated a “sham” office in the DeKalb County community of Sycamore since 2001 after reaching an agreement to pay the town more than $300,000 a year - a fraction of what it would have owed in sales taxes in Chicago and Cook County.
“The only reason that United Fuels has an office in Sycamore is to attempt to create a sham tax situs [location] for fuel sales in a lower taxing jurisdiction,” reads the lawsuit that the Regional Transportation Authority said it filed Monday morning.
United officials, who say they have not seen the lawsuit, said the Sycamore operation is legal.
“We buy fuel in Sycamore,” spokesman Megan McCarthy said in a statement.
The Regional Transportation Authority, which contends the office has no computer and is staffed by one person who only works part time, said consultants visited the site on a recent weekday and found it locked with nobody inside. Judging by the few chairs and empty desks they saw through a window, agents said, there is little, if any, business occurring in the office.
“Whoever is out there is not negotiating hundreds of millions of dollars worth of jet fuel,” said Jordan Matyas, the Regional Transportation Authority’s chief of staff. Any negotiations for fuel - as well as delivery scheduling, accounting, credit approval and administrative decisions - are being done in the Willis Tower in downtown Chicago, where United has its headquarters, he said.
The Regional Transportation Authority alleges that American Airlines is engaged in a similar “sham” business out of an office it rents in Sycamore’s City Hall. But American was not included in the lawsuit, Matyas said, because the airline remains in bankruptcy and that suing American would require litigating the case both in federal bankruptcy court in New York and in Cook County Circuit Court, where the Regional Transportation Authority filed its suit against United. The Regional Transportation Authority does plan to pursue legal action against American at some point, he said.
Based on sales taxes paid in Sycamore, the Regional Transportation Authority estimates that in 2012 alone, the two airlines spent “approximately $1.2 billion on jet fuel”for jets at O’Hare, Matyas said in an e-mail message, adding that it is unclear how much of that was later sold to other airlines.
“Any such suit would be without merit,” United officials said.
“In fact, the operation of our fuel subsidiary in Sycamore has been examined by tax authorities in the past and has been determined to comply with all applicable laws,” McCarthy said in an e-mail message.
In an e-mail message, American spokesman Mary Frances Fagan said that the airline does not comment on pending litigation but: “What American is doing is permitted under Illinois law.”
Sycamore’s city manager, Brian Gregory, declined comment.
The Regional Transportation Authority said in a prepared statement that “sales tax dodges” have cost the city of Chicago $133 million in lost sales-tax revenue since 2005. They have cost Cook County an additional $60 million and Metra, Pace and the Chicago Transit Authority another $96 million, according to the Regional Transportation Authority, which oversees the three agencies and relies on sales-tax revenue for much of its funding.
According to the Regional Transportation Authority, the total sales-tax rate in Sycamore is 9.5 percent, compared to 8 percent in Chicago. But the Regional Transportation Authority contends the airlines are getting an even better deal: The two companies have entered 25-year agreements that call for Sycamore to “kick back” most of its share of the sales tax on jet fuel - as much as $14 million a year - in exchange for payments of at least $300,000 a year from each airline.
A document provided by the Regional Transportation Authority contends that the agreement with United calls for Sycamore to receive $360,000 to $556,000 between 2003 and 2026.
Business, Pages 21 on 01/15/2013