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Sales tax
can also mean
fewer set-up
hassles for





Sam Polsky is a principal of Polsky & Associates Ltd., a law firm based in Chicago.






veryone 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 key points.
     - 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 sales taxes.
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 development purposes.
     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 a developer.
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 improvements.
     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 municipality.

February 2001

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