United and American Fuel Buying Policies Face a Legal Challenge

When I first saw a story about United and American being sued over their fuel buying policies in Chicago, I wasn’t too interested. But then I started digging in and it’s actually a fascinating fight that we’re likely to see play out with various business all over the US as municipalities and public agencies struggle to raise revenues. I’m not a judge, but it appears that what the airlines are doing is lawful, but it’s not exactly adhering to the spirit of the law. The Regional Transportation Authority (RTA) disagrees, and is suing to make it stop.

United and American have both set up fuel buying/selling subsidiaries in the small town of Sycamore, Illinois. Sycamore has a mere 17,500 people and lies an hour west of O’Hare in DeKalb County. (O’Hare and Chicago itself are in Cook County.) Why did these major airlines set up fuel buying subsidiaries here? Well clearly it’s because of the annual Sycamore Pumpkin Festival which is just a delight. Or not. More likely it’s because the airlines found a friendly local government that could save the airlines a boatload of cash.

The suit that was filed is solely against United, because the RTA didn’t want to bother suing an airline in bankruptcy. I’d expect to see that one to come after American exits. For that reason, I’ll focus on United for this story, but you can replace that with American and you’ll get the exact same thing. This chart should sum things up nicely as to what’s happening here.

Chicago vs Sycamore Sales Tax

If United buys fuel from a company in Chicago or at O’Hare (also part of Chicago), it’s subject to a 9.5 percent sales tax. In Sycamore, it’s only 8 percent. On big fuel purchases, that’s a lot of money to be saved. But it’s actually even bigger savings than that.

United undoubtedly found an army of tax law specialists, and they learned that the airline could save money by opening a subsidiary, United Aviation Fuels Corp. The state tax code states that “the seller’s acceptance of the purchase order or other contracting action in the making of the sales contract is the most important single factor in the occupation of selling.”

Here’s how that plays out. United set up a wholly-owned subsidiary that acts as an intermediary. The airline (along with some partner airlines) then technically buys its fuel from the intermediary in Sycamore. The result is that since the subsidiary accepts the purchase orders in Sycamore, the taxes in Sycamore apply, or so says United. That alone saves that 1.5 percent in sales tax. But wait, there’s more.

Part of the deal that United made is that all but just a few hundred thousand dollars of the sales tax that goes to Sycamore gets refunded to the airline. So the savings are huge, to the tune of over $300 million over the last few years across both United and American.

Why would the good folks of Sycamore do this? It’s a no-brainer. They weren’t going to get anything without this deal. But with just a tiny office set up in their town, they now get $430,233 this year with a 2 percent annual increase through 2026 from United alone. That’s a lot of cash for a tiny town. Everyone’s happy, right?

Of course not. Those taxing agencies that are losing out on taxes are angry, and I don’t blame them. This deal has been in place for more than a decade, but they’re just figuring it out now at the RTA. I assume that’s because as funding gets squeezed, United Aviation Fuels Corpthey need to aggressively look for more ways to supplement what they get. (Otherwise public transit rates will keep going up.)

The RTA says that arrangement is not following the law. According to the complaint filed, the RTA cites another part of the tax code to claim that “‘acceptance’ of the subject jet fuel sales does not truly occur in Sycamore nor does United Fuels engage in sufficient sales activity in Sycamore to allow such sales to be sited there for sales tax purposes.”

At right, you see the front door of the United Aviation Fuels Corp. office in Sycarmore. It’s a shared law office. Apparently it has one person who doesn’t come in every day. There isn’t even a computer there. So the RTA says that there isn’t enough of a presence in Sycamore for it to be legitimate.

United says this is bull. The only statement the airline gave is a terse one.

We believe this suit is without merit. 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. We will vigorously defend ourselves against these claims.

So who is right in all this? The judge will give us the answer, I suppose. But I tend to think that United’s lawyers have probably done a pretty thorough job of making sure this was legal when it was set up. If we look at this without a legal lens on, it certainly does have a shady feel to it, but shadiness isn’t a legal issue. (And would you really not do the same thing if it was completely legal?)

The fuel buying decisions for the airline are made in Chicago and the fuel is delivered at O’Hare. But that doesn’t really matter in the eyes of the law, or so it seems. Maybe the RTA will get a victory here but will that get United to stop this practice? I can’t imagine it will. There’s so much money on the table that worst case, United just builds a bigger fuel subsidiary out in Sycamore so that it has more of a presence.

I can understand why the RTA wants this to change, but it seems like the best way to do that is to get the tax code altered. Then again, I’m sure that this case will go a lot deeper than I did in my research. We could always be surprised.

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