United Being Sued for Dodging $100 Million in Fuel Taxes

The Chicago-area Regional Transportation Authority will file suit against United Airlines today for tax evasion — there’s a tax on jet fuel that depends on where the fuel is being purchased, and United keeps an office in DeKalb County to confuct fuel purchase transactions in order to save on the much higher Chicago taxes.

American apparently engages in a similar arrangement, but they aren’t being sued while they’re in bankruptcy — though the Transportation Authority may sue them once they emerge.

How much money is at stake?

The RTA 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 RTA, which oversees the three agencies and relies on sales tax revenue for much of its funding.

Chicago pressed hard to get United to move downtown, taking space in the Willis Tower relocating the headquarters from Elk Grove Village. They benefit tremendously from the operation of O’Hare as a hub for more than one airline.

But with hundreds of millions of dollars at stake, and with an industry that is erratic in its profitability at best, it seems to me that piling on taxes could jeopardize the benefits enjoyed by the city (in revenues they do collect from O’Hare) and its residents (with such convenient and competitive air service).

My general impression as that airlines were taxed at about the level of cigarettes and alcohol (where ‘sin taxes’ make them a convenient target but also ostensibly discourage use, although also make government dependent on their continued existence). The aviation lobbyists contend airlines are taxed more heavily than cigarettes and alcohol.

In addition to the basic corporate taxes that any company would pay, to various jurisdictions, airlines face a 7.5% excise tax on domestic ticket sales, a $3.90 per passenger ‘flight segment tax’ (remember there are hundreds of millions of passengers each year), a 4.3 cent per gallon commercial jet fuel tax, international arrival and departure taxes, and that’s aside from security fees, facilities fees, immigration fees, and customs fees.

Perhaps some of those are appropriate, perhaps even all of them are, that’s not the interesting point here. There’s hundreds of millions more at stake, United and American claim their arrangements are perfectly legal and they can hardly be said to be failing to ‘pay their fair share’ overall.

Suggestive of the idea that the Transportation Authority has ‘gone rogue’, Chicago Mayor Rahm Emanuel is refusing to comment on it.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. It is clear that sales tax on fuel should be charged based the point of delivery not at some office removed from the point of delivery. Therefore Chicago is correct.

    However, any Chicago claim for back taxes prior to American’s bankruptcy should be invalidated if they have not already made their claim in bankruptcy court.

    As to the overall tax burden imposed by the federal government, that is not Chicago’s business. That is a separate debate.

  2. Well, any corporation dumb enough to call Chicago home deserves all the trappings that come with such a distinction. Lets look at where profitable airlines are based…Florida, Texas and Georgia.

  3. One the big reasons why I live in the suburbs and not the city of Chicago is that if you can think of a way for the city to take money out of your pocket you can bet on the city trying it. The city and county are bankrupt, apparently basic the basic math required to know that you can not spend more than you make are not possessed by a single member of city government. Add to the incompetence and gross fiscal responsibility a systemic and ubiquitous culture of corruption then you can see why this “tax evasion” lawsuit is a cash cow to the empty pockets of Chicago.

  4. Just like the AA/US merger, I think you are talking about issues that are — to be polite — out of your core competency. Have you read all of the public filings on the issue? Are you a tax lawyer?

    Your travel tips are awesome. I love the blog. But, why are you commenting about these types of arcane issues other than for the Twitter ping and to provide (mostly uninformed) content?

    Yes, we know you’re here.

  5. @mark- respectfully I do not make a claim regarding the viability of the legal arguments on either side.

    I’m pointing out what I viewed as interesting news. The Regional Transit Authority is making a public case that because of United’s failure to pay its share, service is degraded and others pay more. I’m offering commentary in response that as a policy matter — an area in which I do have a degree of competence — I do not think the suit is a good idea. And that I don’t think he framing of the airline as a tax cheat represents the full picture.

    I’m not a lawyer, let alone one with a specialization in regional tax issues, which is why I do not offer an opinion on the legal case. Just an opinion on whether pursuing that case — even if it’s viable — seems inadvisable.

    And on the AA/US merger my position has been that (1) these mergers rarely produce the promised synergies, that (2) they often happen as a result of the acquiring entity overpaying [see ‘winners curse’], and that because of #1 and #2 I believe that US Airways shareholders would not be made better off as a result of the combination. And I combine that with the historical evidence on record regarding US Airways’ CEO’s seeming interest in making decisions based on running larger and larger entities (multiple attempts at merging with United, the first reportedly scorned largely because he wasn’t going to get to run the airline, as well as an attempt at Delta and now American, suggesting that they’ll bend the facts to make a case that ANY merger is advantageous which defies credibility).

    And beyond that I make the argument that most American Airlines *frequent flyers* won’t be better off as a result of a merger, which has little bearing on whether the merger will or should happen, just offering m predictions for the business travel public. Although I personally will benefit as a DCA-based flyer.

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