United, American Airlines Accused of Tax Avoidance

 - January 21, 2013, 12:50 PM
American Airlines “accepts” its fuel for its O’Hare International Airport operation in Sycamore, Illinois, a town 60 miles west of Chicago. (Photo: American Airlines)

The Regional Transportation Authority (RTA) for Chicago and its surrounding region has publicly charged United Airlines and American Airlines with running “sham” business operations conceived to circumvent city and RTA sales taxes. In a lawsuit filed against United last week, the RTA–a municipal corporation of government that oversees the Chicago area’s public transportation departments–claimed that the airline established shell offices in the town of Sycamore, Illinois, where it pays a total tax rate of 8 percent. According to the RTA, both United and American operate rarely occupied offices in Sycamore for the explicit purpose of claiming to buy their jet fuel in the town, thereby saving 1.5 percent in sales taxes and depriving Chicago and Cook County taxpayers of nearly $300 million over the last seven years.

The RTA has decided to delay filing suit against American Airlines due to the carrier’s Chapter 11 bankruptcy status.

“Both airlines purchase and use millions of gallons of jet fuel in Chicago,” said the RTA in a statement. “Despite this, since 2001, United has claimed to ‘accept’ jet fuel at its office in a Sycamore strip mall, while American has been ‘accepting’ jet fuel at its small, windowless office inside Sycamore’s town hall since 2004.”

Contacted by AIN for comment, both airlines said their fuel purchase practices fully comply with Illinois law. “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,” said United. “We will vigorously defend ourselves against these claims.”

Illinois law differs from those in most other U.S. states in that it allows companies to pay sales taxes based on where they “accept” the product, as opposed to where they might actually receive it.

The airlines have entered into 25-year agreements with Sycamore, United in 2001 and American in 2004. The RTA further charges that Sycamore “kicks back” to the airlines a large part of its share of the sales tax, amounting to as much as $14 million a year.

“Governments across the country have been forced to do more with less. [The Chicago Transit Authority,] Metra [commuter rail] and Pace [suburban bus and paratransit] 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,” said RTA executive director Joe Costello. “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. That is just wrong.”