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Monday, January 22, 2024

Court Considers Sales Tax Misallocation Case Between Two Municipalities

An Illinois Appellate Court permitted a Village to sue and seek reimbursement for over $1M in sales tax revenue that had been erroneously allocated to a different municipality, and held that the Village was not limited to a reimbursement of only the last six months of misallocated revenue. Village of Arlington Heights v. City of Rolling Meadows.

In 2011, a restaurant opened in the Village. The Illinois Department of Revenue (IDOR) mistakenly located the restaurant in a neighboring City. As a result, the restaurant’s sales tax revenue that should have gone to the Village instead was allocated to the City. In March 2020, the Village discovered the error and alerted IDOR. Although the City had received over $1.1M dollars from the restaurant’s sales tax from 2011 to 2020, the Village was only reimbursed for $100K of that misallocated revenue based on the IDOR's claim that state law limited reimbursement of funds to only the prior six months since the error was discovered. When the City refused to return the remaining $1M in unfairly received sales tax revenue to the Village, the Village sued the City. The trial court dismissed the Village's lawsuit on the ground that the court did not have jurisdiction to hear the tax case, and the Village appealed.

The Appellate Court reversed the trial court on three bases. First, the Appellate Court held that the trial court did, in fact, have jurisdiction to calculate the sales tax amount that should have been allocated to the Village. Second, the Appellate Court held that the City was obligated to monitor its tax rolls to discover the mistake within the initial six months of IDOR’s error, so allowing the City to keep the $1M in misallocated tax revenue would be an unfair windfall to the City. Third, the Court determined that the Village was not precluded from suing the City because the issue was not only about the IDOR's error, but also the return of the misallocated funds to the Village. 

Post Authored by Dan Lev, Ancel Glink


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