has heard of tax increment financing, but less well known is another
type of municipal incentive that can particularly benefit retail
developments – sales tax financing agreements. They are misunderstood
yet increasingly effective incentive tools that developers should
consider for certain retail projects. The City of Chicago doesn’t
offer them but most surrounding municipalities will consider sales
tax incentives as a way to attract a favored tenant or project,
or to help finance extraordinary development costs.
The legal distinctions between TIF
and sales tax agreements are substantial, including the following
- Sales tax agreements rebate to the
developer a portion of new local sales taxes generated by a project,
thus reducing project costs.
- Only those incremental sales taxes
paid to the municipality can be rebated, typically 1%, but his amount
can be higher for home-rule municipalities authorized to levy additional
While newly generated sales taxes my also be part of a TIF, sales
tax agreements can be totally independent of a TIF plan.
- If independent of a TIF plan, no
“blighting” finding is usually necessary, although there
may need to be finding that the property was vacant or under-utilized
for at least one year.
- The political process for setting
up a sales tax financing plan is easier than that for a TIF, since
no tax district approval or hearings are required.
Most municipalities already have the authority to pledge the local
portion of sales tax receipts to be used for infrastructure or general
The benefit for a developer is relatively
clear-cut. Sales tax agreements take a portion of new sales tax
generated from a new retail project and pay those taxes, when received,
to a developer as a reimbursement for project costs. Many such agreements
pay interest on the sums being reimbursed, meaning that developer
receives the net present value of its costs.
If a project generates $60 million
in annual sales, at least $600,000, or 1%, of that figure will be
available to the municipality; and in many customary agreements
one-half of those taxes, or $300,000 per annum, may be available
to be rebated back to the developer over a 10-year period. This
could add about $3 million in gross funding, or $2 million in net
present value, to the development’s bottom line.
While sales taxes can also be used in conjunction with a TIF, they
can be used independently, avoiding the necessity of a TIF plan
and eligibility findings. Also, no hearings are needed before local
taxing districts, and there’s no need to convene cumbersome
joint review boards, since no other taxing districts are involved.
From a municipality’s standpoint sales tax dollars potentially
coming out of its coffers rather than from overlapping taxing districts.
Nevertheless, if a major retailer won’t relocate in that municipality
“but for” the sales tax assistance, the municipality
wouldn’t receive any new sales tax dollars in that case.
Many of the factors that justify TIF incentives also justify sales
tax financing: difficult land assemblages, obsolete subdivisions,
or infrastructure needs. All of these are among the reasons that
municipality might enter into a sales tax incentive agreement with
Of course, higher-grossing tenants will yield a higher value to
any sales tax incentives. Developers will want to include sales
taxes from all users, even those users who buy their own parcels.
There’s no restriction on pledging sales tax revenue from
all property owners who are part of an overall development plan.
Since development costs may frequently include large infrastructure
or other public improvement costs to benefit all users, the developer
will be entitled to the sales tax incentive needed to pay for those
Sales tax financing may be useful for any project in which there
are any extraordinary costs or site issues, and which will produce
significant sales taxes. This type of incentive agreement can mean
more dollars, with fewer set-up hassles, for both developer and