# State ofIllinois Aviation Fuel Tax Revenue Action Plan

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. 01• enie,,• The State of Illinois submits this action plan pursuant to 79 FR 66282 (Policies and Procedures Concerning the Use of Airport Revenue; Proceeds from Taxes on Aviation Fuel, November 7, 2014). This action plan identifies all taxes administered by the Illinois Department ofRevenue which are either imposed on aviation fuel or general merchandise. In Appendix A, you will find the following information regarding the grandfathered taxes; copies oflegislation for each tax reflectingthat the tax was in effect on December 30, 1987 as well as any subsequent amendments to the rate of tax, and a summary detailing the legislative history for each tax
. These documents are included in the action plan to demonstrate that such taxes are grandfathered and not subject to the revenue use requirements. In Appendix B, you will find the following information regarding the non-grandfathered taxes: copies oflegislation ofeach such tax Act and a summary detailing the legislative history for each tax. In Appendix C, you will find a detailed flow chart of the distribution scheme for the four Illinois Sales Tax Acts; the Retailers' Occupation Tax Act, the Use Tax Act, the Service Occupation Tax Act, and the Service Use Tax Act. Appendix D includes examples ofthe returns which will need to be amended in order to discretely account for aviation fuel tax
. This action plan will also set out a transition timeline to comply with the rule and explain the legal and procedural issues the State must address in order to do so. The action plan will detail the process that the State must undertake to develop reporting requirements and tracking systems for discrete information on aviation fuel tax revenues. This action plan will describe how the State has acted and intends to act in order to address the revenue use of nongrandfathered taxes through legislative initiatives in the future. Please note that this plan covers all taxes on aviation fuel, including local taxes, which the Department ofRevenue administers. Additional taxes on aviation fuel may be imposed by local governments which are not administered bythe Department and are therefore not addressed in this plan.JI
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Illinois has identified the following taxes which are at least in somepart grandfathered as they were in effect onDecember30, 1987 (See Appendix A): TheRetailers' Occupation Tax The Use Tax The Service Occupation Tax The Service Use Tax The Regional Transportation Authority Retailers' OccupationTax The Regional Transportation Authority Service Occupation Tax TheMetro-East Mass Transit District Retailers' Occupation Tax TheMetro-East Mass Transit District Service Occupation Tax The County Water Commission Retailers' Occupation Tax The County Water Commission Service Occupation Tax Illinois has identified the following taxes which were not in effect on December 30, 1987, and are therefore subject to the revenue userequirements (See Appendix B): The HomeRule Municipal Retailers' Occupation Tax The Home Rule Municipal Service Occupation Tax The Non-Home Rule Municipal Retailers' Occupation Tax The Non

-Home Rule Municipal Service Occupation Tax The Non-Home Rule Municipal Retailers' Occupation Tax; municipalities between 20,000 and 25,000 TheNon-Home Rule Municipal Service Occupation Tax; municipalities between 20,000 and 25,000 The Home Rule County Retailers' Occupation Tax The Home Rule County Service Occupation Tax TheMetro-East Park and Recreat ion District Retailers' Occupation Tax TheMetro-East Park and Recreation District Service Occupation Tax The Special CountyRetailers' Occupation Tax for Public Safety orTransportation The Special County Service Occupation Tax for Public Safety or Transportation The Environmental Impact Fee The Leak ing Underground Storage Tank TheRock Island County Retailers' Occupation Tax TheRock Island County Service Occupation Tax The County Flood Prevention Retailers' Occupation Tax The County Flood Prevention Service Occupation Tax The County School Facility Retailers' Occupation Tax The County School Facility Service Occupation Tax

2 (( The Salem Civic Center Retailers' OccupationTax The Salem Civic Center Service Occupation Tax The STAR Bond Retailers' Occupation Tax The ST AR Bond Service Occupation Tax The Business District Retailers' Occupation Tax The Business District Service Occupation Tax

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The Illinois General Assembly is typically scheduled to be in session each year from January through May. Any legislation to address these issues will need to be introduced and passed during this timeframe. The Governor then has 60 days t o act on a bill before it becomes law. As evidence that the Illinois General Assembly has already begun making a good faith effort to comply with the rule, a bill was introduced last year in the Illinois Senate, which outlines one approach to the issues surrounding compliance with the revenue use requirements. The bill exempts aviation fuel from tax and creates an aviation fuel excise tax, the revenue from which is deposited into an aviation fuel tax fund

. The bill was not passed during the 2015 legislative session. Though we continue to consider the possible legislative solutions, the administration has not endorsed this particular bill, and the final legislation on this topic may differ from the version introduced last year.
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The State ofIllinois intends to comply with this rule by the deadline established by the FAA ofDecember 8, 2017. The State ofIllinois will require the next two years to address many legislative, legal, procedural, and administrative issues that will accompany this implementation. During the next two years, the State of Illinois will attempt to pass legislation to bring its tax code into compliance with 49 U.S.C. §47133

. Because Illinois currently taxes aviation fuel as general merchandise, t he State will also need to amend each form and tax return associated with the affected taxes in order to create a line for aviation fuel tax to begin accounting for aviation fuel tax revenue by isolating sales ofaviation fuel from other general merchandise on tax returns. Substantial education efforts must also be undertaken with both the retail community and local governments in order to begin accounting for such revenue. 

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The State ofIllinois must address several legal issues in our attempt to comply with the FAA's rule on aviation fuel tax revenue use. Many ofthese issues stem from the structure of

3Illinois state government, and local government in particular. Some limitations are constitutional in nature. We will face substantial underfunding of cmrent statutorily obligated areas such as education and environmental funds. Any legislation that is introduced on this topic \vill substantially affect local governments as many ofthe municipalities in Illinois impose individual local taxes on general merchandise in addition to the State rate oftax that is imposed. The Illinois State Constitution provides "home rule municipalities" with wide latitude in their taxing power. By the same token, it is not a simple task for the legislature to restrict or limit a home rule municipality's ability to tax. Because a legislative proposal on this topic will include a limitation ofmany home rule units' power to tax aviation fuel unless it is used for aviation purposes, any such legislation must be passed by a three-fifths supermaj01ity vote of the Illinois General Assembly. The Illinois Constitution states that "[t]he General Assembly by a law approved by the vote ofthreefifths ofthe members elected to each house may deny or limit the power to tax and any other power or function of a home rule m1it not exercised or performed by the State other than a power or function specified in subsection (I) of this section." 1 Assuming the measure receives a three-fifths majority vote, we anticipate numerous legal challenges from local governments across the State ofIllinois as a result. The State of Illinois faces additional funding challenges as the Leaking Underground Storage Tank Tax and Environmental Impact Fee are imposed on aviation fuel.2 The Underground Storage Tank Fund is a statutolily mandated fund which is eannarked to assist tank owners and operators with cleanup costs associated with petroleum leaks from underground storage tanks. The Fund also serves to satisfy the Federal financial assurance requirements for Illinois tank owners and operators. The Environmental Impact Fee and the Underground Storage Tank fee are imposed on the receiver ofce11ain petroleum products in Illinois, including aviation fuel. The fees are treated as one tax for a combined rate of 1.1 cents per gallon (Underground Storage Tank rate of $.003 per gallon of fuel and EIF rate of $.008 per gallon of fuel sold). Aviation fuel sold to qualified air carriers is currently exempt from the tax. In order to continue operations of the Underground Storage Tank program and maintain important environmental standards and to continue compliance with Federal assurance requirements, we will need to create a new funding source for the program. Many of the Illinois tax Acts contain a provision that allows a retailer or serviceman to take a discount on his/her return of 1.75% to cover the cost ofcollection. Many retailers rely on this discount, which has existed for decades. As you will see in our later analysis of grandfathered taxes, the discount is grandfathered in many cases, but only on the portion ofthe tax that is grandfathered. Ifwe discontinue a portion ofthe discount that retailers are currently accustomed to receiving for their collection costs, we expect numerous legal challenges from the retail community. An additional issue that will prove challenging for the State of Illinois is that some tax revenues have been dedicated or secured through the sale ofbonds. The County School Facility Retailers' Occupation Tax and the County School Facility Service Occupation Tax are

1 Ill. Const. 1970, Art. 7, Sec. 6(g). 2 35 ILCS 505/2a; 415 ILCS 125/301
4particularly affected in this way. The purpose of this tax is to establish an alternative funding mechanism for school districts in Illinois to the traditional property tax revenue stream
. The funding is distributed proportionate to the st udent population ofeach district in a county. The revenue can be used to pay offexisting debt which was incurred in the past. The revenue can also fund projects and any school facility related capital expense such as building and repairing facilities, energy efficiency improvements, safety and securitymeasures, and land acquisitions. Not only is the revenue statutorily dedicated to be used exclusively for "school facility purposes" in the county, but the districts have bonds in place which were secured by the proceeds from the tax
. Removing their revenue stream to repay the school districts' debt will be an incredible burden on school districts and will likely have a substantial impact on the reliance on property tax revenues in communities across the State ofIllinois

. This issue may also exist generally in local governments throughout the State ofIllinois

. Because the State does not maintain any authority over how local governments spend the revenue that is disbursed to them, any local tax revenue could also be previously dedicated by bonds. This could also be the case for the 1.25% ofthe State rate which is distributed to local governments.

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The State ofIllinois will require the next two years (until December 8, 2017) to address many legislative, legal, procedural, and administrative issues that will accompany this implementation. During the next two years, the State ofIllinois will attempt to pass legislation to bring its tax code into compliance with 49 U.S.C. §47133. Because Illinois currently taxes aviation fuel as general merchandise, the Illinois Department ofRevenue will first need to adjust its systems to enable the Department to separately account for sales of aviation fuel. The Department also needs to amend each form and tax return associated with the affected taxes in order to create a line for aviation fuel tax to begin accounting for aviation fuel tax revenue by isolating sales of aviation fuel from other general merchandise on tax returns. This includes several returns and publications and will require a great deal oftime, manpower, and resources. Substantial education efforts must also be undertaken with both the retail community and local governments in order to begin accounting for such revenue.

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