Heyl Royster


Statute Requires Disclosure of Economic Development Terms/Rebate Agreements

It is not unexpected that tax payers will attempt to limit the amount of taxes they pay. However, one tax avoidance practice of recent years has come under significant scrutiny with the end result being a change in statute.

The practice in question involves a retailer which is physically located in a higher tax jurisdiction establishing a "sales office" in a lower tax jurisdiction. The retailer then arranges for "sales acceptance" to occur at the "sales office." This is purportedly accomplished by customers being directed to place their sales through the outlying "sales office." The retailer then asserts that the situs for taxation is the lower tax jurisdiction, thereby saving the tax rate differential on the sale.

One variation of this procedure is for a third party to set up the arrangement with the retailer and for the third party to establish and operate the "sales office" in the lower tax jurisdiction.

It is not unusual for this arrangement to be accompanied by an economic development/rebate agreement whereby the lower tax jurisdiction (which is itself now receiving the local portion of the sales tax) agrees to rebate to the retailer or third party a significant portion of the sales tax newly obtained by the lower tax jurisdiction. In the case of a third party arrangement, the third party may then share a portion of the rebate with the retailer.

The validity of this arrangement has been called into question in a number of suits in Illinois.

While one court has deemed one such arrangement legal based on very specific legal facts, that case is presently on appeal. Other cases have been filed challenging this arrangement.

One of the many issues arising out of this sales tax practice is whether information relating to these economic development/rebate agreements is exempt from disclosure under the Freedom of Information Act. This position has been taken by a number of communities which have such agreements involved in litigation.

To address this question, the legislature passed PA 97-0976 this past year. It modifies the Freedom of Information Act, the Counties Code, and the Illinois Municipal Code. The statutory changes require that a city or county which enters into an agreement to share or rebate any portion of the retailer's occupation taxes must complete and submit a report by electronic filing to the Department of Revenue within 30 days after execution of the agreement. For agreements prior to the effective date (1/1/13), the reports are to be submitted within 90 days after the effective date of the statute.

The report is to contain the following information: the names of the county or city and business entering into the agreement; the locations of the business within the city or county; whether or not the company maintains additional places of business in the state and where; the terms of the agreement, including the manner in which the retailer's occupation tax is to be shared, rebated or refunded; the duration of the agreement; the name of any business which is not a party to the agreement but which directly or indirectly receives a portion of the rebate; and a copy of the agreement to share rebate a portion of the sales tax. Any amendment to the agreement is to be filed within 30 days after the execution of the amendment.

The actual sales figures, including the amount of sales tax collected and the amount of sales tax rebated, are to be redacted from public disclosure and are exempt from the provisions of the Freedom of Information Act. Otherwise, the information is subject to FOIA.

All such reports required to be filed with the Department of Revenue are to be posted on the Department's website within 6 months after the effective date of the Act. The website is to be updated on a monthly basis to include newly received reports.

This statutory change, in addition to other statutory changes from the past year, will be the topic of a discussion in an upcoming HRVA seminar. If you have questions about this statute, or any legal matter, please don't hesitate to contact us.