Illinois Municipal League Saturday, September 20, 2014 Sales Tax Litigation and Changes in Illinois: Hartney & RTA Litigation and the New Department of Revenue Sourcing Rules Carlos Arévalo and Ruth Schlossberg Zukowski, Rogers, Flood & McArdle 50 Virginia Street Crystal Lake, IL 60014 815-459-2050 www.zrfmlaw.com carevalo@zrfmlaw.com/rschlossberg@zrfmlaw.com Paul Berks Deputy General Counsel Illinois Department of Revenue 100 W. Randolph Street, 7th Floor Chicago, IL 60601 (312) 814-4680 Paul.Berks@Illinois.gov Paul Lee City of Chicago Office of the Mayor Legislative Counsel & Government Affairs Office: (312) 744-7965 paul.lee@cityofchicago.org

PART I: ECONOMIC INCENTIVE AGREEMENT RULES IN ILLINOIS 65 ILCS 5/8-11-20 65 ILCS 5/8-11-21

CAN MY TOWN ENTER INTO AN ECONOMIC INCENTIVE AGREEMENT? YES Home Rule & Non – Home Rule BUT You must follow the Illinois Municipal Code Rules You have to be careful that one of the prohibitions does not apply: “no poaching” You have to report on this to the IDOR

65 ILCS 5/8-11-20 & 21: ECONOMIC INCENTIVE AGREEMENT RULES Sec. 8-11-20. Economic incentive agreements. The corporate authorities of a municipality may enter into an economic incentive agreement relating to the development or redevelopment of land within the corporate limits of the municipality. Under this agreement, the municipality may agree to share or rebate a portion of any retailers' occupation taxes received by the municipality that were generated by the development or redevelopment over a finite period of time. Before entering into the agreement authorized by this Section, the corporate authorities shall make the following findings: (1) If the property subject to the agreement is vacant: (A) that the property has remained vacant for at least one year, or (B) that any building located on the property was demolished within the last year and that the building would have qualified under finding (2) of this Section; (2) If the property subject to the agreement is currently developed: (A) that the buildings on the property no longer comply with current building codes, or (B) that the buildings on the property have remained less than significantly unoccupied or underutilized for a period of at least one year; (3) That the project is expected to create or retain job opportunities within the municipality; (4) That the project will serve to further the development of adjacent areas;

65 ILCS 5/8-11-20 & 21: ECONOMIC INCENTIVE AGREEMENT RULES (5) That without the agreement, the project would not be possible; (6) That the developer meets high standards of creditworthiness and financial strength as demonstrated by one or more of the following: (A) corporate debenture ratings of BBB or higher by Standard & Poor's Corporation or Baa or higher by Moody's Investors Service, Inc.; (B) a letter from a financial institution with assets of $ 10,000,000 or more attesting to the financial strength of the developer; or (C) specific evidence of equity financing for not less than 10% of the total project costs; (7) That the project will strengthen the commercial sector of the municipality; (8) That the project will enhance the tax base of the municipality; and (9) That the agreement is made in the best interest of the municipality.

Economic Incentive Agreements: the Details…. Required Findings: If Vacant Property Vacant for at least one year If a building on the property has been demolished within last year, it must have qualified under developer property standards (below) OR If Currently Developed Property: That the buildings on the property no longer comply with current building code, or That the buildings on the property are less than significantly unoccupied or underutilized for at least one year; AND….

Economic Incentive Agreements: the Details…. ….AND…. create or retain jobs further development of adjacent areas without the agreement, project would not be possible

Economic Incentive Agreements: the Details…. ….AND…. Developer meets high standards of creditworthiness and financial strength as demonstrated by one or more of the following: Corporate debenture ratings of BBB or higher by Standard and Poor’s Corporation or Baa or higher by Moody’s Investors Service, Inc.; letter from a financial institution with assets of $10M or more attesting to the financial strength of the developer; or (c) Specific evidence of equity financing for not less than 10% of the total project costs;

Economic Incentive Agreements: the Details…. ….AND…. Project will strengthen the commercial sector of the municipality; Project will enhance the tax base of the municipality; and Agreement Is in the best interests of the municipality.

But wait!...There’s more….65 ILCS 5/8-11-21…and this is where the RTA lawsuits come in….. Sec. 8-11-21 Limitations on Agreements to share or rebate occupation taxes

But wait!...There’s more….65 ILCS 5/8-11-21 DON’T POACH IF TAXES WERE DUE ELSEWHERE: (a) On and after June 1, 2004, the corporate authorities of a municipality shall not enter into any agreement to share or rebate any portion of retailers' occupation taxes generated by retail sales of tangible personal property if: (1) the tax on those retail sales, absent the agreement, would have been paid to another unit of local government; and (2) the retailer maintains, within that other unit of local government, a retail location from which the tangible personal property is delivered to purchasers, or a warehouse from which the tangible personal property is delivered to purchasers. Any unit of local government denied retailers' occupation tax revenue because of an agreement that violates this Section may file an action in circuit court against only the municipality. Any agreement entered into prior to June 1, 2004 is not affected by this amendatory Act of the 93rd General Assembly [P.A. 93-920]. Any unit of local government that prevails in the circuit court action is entitled to damages in the amount of the tax revenue it was denied as a result of the agreement, statutory interest, costs, reasonable attorney's fees, and an amount equal to 50% of the tax.

But wait!...There’s more….65 ILCS 5/8-11-21 HOME RULE PREEMPTED: (b) On and after the effective date of this amendatory Act of the 93rd General Assembly, a home rule unit shall not enter into any agreement prohibited by this Section. This Section is a denial and limitation of home rule powers and functions under subsection (g) of Section 6 of Article VII of the Illinois Constitution [Ill. Const. (1970) Art. VII, § 6]. REPORT TO IDOR: (c) Any municipality that enters into an agreement to share or rebate any portion of retailers' occupation taxes generated by retail sales of tangible personal property must complete and submit a report by electronic filing to the Department of Revenue within 30 days after the execution of the agreement. Any municipality that has entered into such an agreement before the effective date of this amendatory Act of the 97th General Assembly that has not been terminated or expired as of the effective date of this amendatory Act of the 97th General Assembly shall submit a report with respect to the agreements within 90 days after the effective date of this amendatory Act of the 97th General Assembly.

But wait!...There’s more….65 ILCS 5/8-11-21 REPORT TO IDOR, continued: (d) The report described in this Section shall be made on a form to be supplied by the Department of Revenue and shall contain the following: (1) the names of the municipality and the business entering into the agreement; (2) the location or locations of the business within the municipality; (3) a statement, to be answered in the affirmative or negative, as to whether or not the company maintains additional places of business in the State other than those described pursuant to paragraph (2); (4) the terms of the agreement, including (i) the manner in which the amount of any retailers' occupation tax to be shared, rebated, or refunded is to be determined each year for the duration of the agreement, (ii) the duration of the agreement, and (iii) the name of any business who is not a party to the agreement but who directly or indirectly receives a share, refund, or rebate of the retailers' occupation tax; and (5) a copy of the agreement to share or rebate any portion of retailers' occupation taxes generated by retail sales of tangible personal property.An updated report must be filed by the municipality within 30 days after the execution of any amendment made to an agreement. Reports filed with the Department pursuant to this Section shall not constitute tax returns.

But wait!...There’s more….65 ILCS 5/8-11-21 REPORT TO IDOR, continued: (e) The Department and the municipality shall redact the sales figures, the amount of sales tax collected, and the amount of sales tax rebated prior to disclosure of information contained in a report required by this Section or the Freedom of Information Act [5 ILCS 140/1 et seq.]. The information redacted shall be exempt from the provisions of the Freedom of Information Act. (f) All reports, except the copy of the agreement, required to be filed with the Department of Revenue pursuant to this Section shall be posted on the Department's website within 6 months after the effective date of this amendatory Act of the 97th General Assembly. The website shall be updated on a monthly basis to include newly received reports.

Municipal Code still applies DO THE NEW SALES TAX RULES CHANGE MY AUTHORITY TO ENTER INTO AN ECONOMIC INCENTIVE AGREEMENT? NO At least not directly Municipal Code still applies But the test of whether the business’ retail sales tax would be due elsewhere will still apply And where those taxes might be due might change under the new rules

HOW DO I KNOW IF TAXES WERE DUE ELSEWHERE? Complicated question Subject of litigation Do IDOR decide? Does Taxpayer decide? What should a municipality know?

SO HOW DO I KNOW WHERE TAXES ARE DUE? The Hartney decision changed longstanding practice No more bright line test that taxes are due at the point of sale New IDOR Rules will apply

PART II: PRESENTATION BY PAUL BERKS, ILLINOIS DEPARTMENT OF REVENUE

Part III: So What Does this Mean for my Municipality? What does this mean for us? Does this have implications for our local businesses? What if I want to enter into a new economic incentive agreement?