Is Chicago earning all that it should from Lollapalooza?

October 4, 2010

UPDATE, OCT. 6: Department of Revenue Spokesman Ed Walsh emailed today with the following correction to my reading of the amusement tax passages in Chicago's municipal code: "The amusement tax percentage you quoted in your posting was incorrect. The percentage is 5% not 9% fo[r] live theatrical, musical, and other cultural performances held in a space with a maximum capacity exceeding 750 persons."

He also wrote that the applicant for the tax exemption under 4-156-020b5c of the Municipal Code was the Parkways Foundation. I had written "Lollapalooza." But C3 Presents and Parkways are in fact partners in presenting Lollapalooza, as the logo pictured above (as well as the 10-year deal with the city) makes abundantly clear.

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Five years into a long-term deal that keeps the massive concert in Grant Park through 2018, Lollapalooza has generated an average of a million dollars a year for a non-profit arm of the Chicago Park District dedicated to park improvements.

But the three-day festival, one of the biggest in the U.S., grossed more than $17 million last August, and politically connected concert promoters C3 Presents have struck a sweetheart deal with the city that exempts them from paying the taxes that any other concert or entertainment event would have to pay.

Altruistic claims in Lollapalooza's press releases aside, the question looms:

Is Chicago really collecting all of the money that it should be getting from the musical Walmart on the Lake -- especially in the midst of what's been called the worst budget crisis in the city's history, with city services being slashed and lay-offs of police, sanitation workers, and teachers threatened?

As C3 Presents gears up this weekend for the Austin City Limits Music Festival, the smaller sister of Lollapalooza that takes place in Zilker Park in the company's home town, some in the Texas capital are questioning whether they get a raw deal from that three-day concert. Civic boosters in Austin say that the ACL Fest brings $80 million a year into the local economy. "But how much of that goes into the city's budget?" Reagan Hackleman asked last week in a report for KAXN.com. "Roughly $100,000."

The report continued: "When compared to Lollapalooza, another three-day festival in Chicago produced by C3, the numbers look a little better for Chicago's parks department. Although Chicago does not charge C3 a rental fee, C3 did pay $1,050,000 to The Parkways Foundation (Chicago's non-profit park foundation)."

Though C3 closely guards Lollapalooza's balance sheets, the concert industry trade publication Venues Today reported some impressive figures a few weeks ago for Lollapalooza 2010, with gross ticket sales for the three-day festival totaling $17,251,715 -- sponsorship revenue and food, beverage, and merchandise sales add substantially more to that number -- and total attendance hitting 238,247.

But as this blog reported in a June post examining the unique 10-year deal that essentially creates a partnership between C3, Parkways, and the Park District, a strange clause jumps out of the contract:

[Parkways shall] obtain the Festival Permit"¦ obtain a liquor license in the name of Parkways"¦ and assist C3 in making appropriate filings (in Parkways' name if necessary) to eliminate or reduce the amount of taxes, including sales tax and amusement tax, that must be paid in relation to the Festival.

According to Chicago's municipal code, any promoter attempting to stage a concert in Grant Park or anywhere else that is even a fraction of the size of Lollapalooza would pay 9 percent in taxes on every ticket sold. On top of that, the Park District certainly would charge a substantial figure, possibly $1 million or more, to rent and close the city's prime lakefront public space for the more than three weeks of set-up, the concert itself, and the clean-up and tear-down afterwards.

The (literally) million-dollar question: Does the fact that for-profit concert promoters and Daley administration favorites C3 Presents partner with the non-profit Parkways Foundation and have them apply for all of Lollapalooza's licenses really mean that the Texas promoters are avoiding paying taxes that any other business would have to pay?

As it boasts in all of its press releases, but as confirmed by documents obtained from the city, since 2005, C3 and Lollapalooza have generated more than $5 million for Parkways, the non-profit organization set up by the Chicago Park District, headquartered in its offices, and charged with raising funds for parks improvements. Financial reports are not yet available for 2010, and it is unclear if the number cited by KAXN -- $ 1,050,000 -- is accurate for Parkway's take this year.

The contract with the city stipulates that Lollapalooza pay Parkways 10.25 percent of gross revenue and 8.5 percent of sponsorship revenue each year. (There is no way to determine what the 8.5 percent of sponsorship revenue due the city should be, since C3 does not make the number it earns from sponsorships public.)

The average payment of $1 million a year that Parkways has been collecting hardly is chump change, especially in this economy. But it is less than $1,552,654 -- or the 9 percent in amusement taxes any other concert would pay on a total ticket gross of $17,251,715 last August. And it is less than $1,768,301 -- or the 10.25 percent of that gross figure due per the contract.

Should the city be making half a million dollars or more above what it has been collecting from Lollapalooza, in addition to a substantial sum to rent and close Grant Park?

Jessica Maxey-Faulkner, director of the press office for the Chicago Park District, declined two requests in recent weeks to discuss Lollapalooza's tax status, saying that questions were best posed to C3 Presents and Parkways. C3 spokeswoman Shelby Meade and Parkways executive director Brenda Palm declined three requests to answer questions about Lollapalooza's tax status.

The Chicago Department of Revenue, charged with collecting taxes and fines from residents and businesses, also was less than completely forthcoming.

"We are limited in what information we can provide," said Revenue spokesman Ed Walsh. He proceeded to cite an excerpt from the Municipal Code mandating that "all information that the department or the department of administrative hearings receives from returns or reports from any investigation, or from any hearing conducted under this chapter, or under any tax ordinance, shall be confidential and shall be used for official purposes only."

"What I can say," Walsh added after further probing, "is the applicant" -- Lollapalooza -- "applied for and was granted an exemption under 4-156-020b5c of the Municipal Code."

Here is the passage of the code in question:

4-156-020‚  Tax imposed. Except as otherwise provided by this article, an amusement tax is imposed upon the patrons of every amusement within the city. The rate of the tax shall be equal to nine percent of the admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement.
B. The tax imposed by subsection A shall not apply to the following persons or privileges:
(5) Subject to satisfying the requirement contained in subsection (C) of this section, the privilege of witnessing or participating in any amusement sponsored or conducted by and the proceeds of which, after payment of reasonable expenses, inure exclusively to the benefit of:
(c) Societies or organizations conducted and maintained for the purpose of civic improvement.

Clearly, Lollapalooza is a for-profit venture, albeit one uniquely partnered with a non-profit, city-founded organization devoted to civic improvements. But profits from the concert, "after payment of reasonable expenses" such as staging costs and fees to the performers, do not "inure exclusively to the benefit of civic improvements." They flow into the bank accounts of C3 Presents.

It is worth noting here that as reported previously, C3's deal with Parkways and the Park District was crafted in part by lobbyist and attorney Mark Vanecko, a nephew of Mayor Richard M. Daley.

It appears that the vendors who sell food and alcohol at Lollapalooza also are getting a break on paying city taxes.

"The city's Restaurant Tax has a premises provision that appears to make a festival exempt," Walsh said. "The premises provision requires that the business owner has control over the space where the food is consumed, i.e. a restaurant.‚  Food consumption at Lollapalooza likely doesn't meet that definition if patrons can consume the food anywhere they want on the grounds."

As for alcohol, Walsh said: "Wholesalers remit the City's Liquor Tax to the City, not retailers." In other words, the companies that sell the beer and liquor to the festival's vendors pay the taxes; the vendors do not.

As reported earlier, alcohol sales at the concert are handled by a company called Lollapalooza Festival Services that lists as its officers Jeffrey Waughtal, co-owner of Stubb's Bar-B-Q, C3's major concert venue in Austin, and Kevin Killerman, a Wrigleyville bar owner and friend and client of Daley's nephew, Vanecko.

What does all of this mean to taxpayers?

It certainly seems as if Lollapalooza's financial deal with Chicago is ripe for examination by a City Council grappling with a staggering budget deficit and beginning to look at life after the Daley Machine, which could not have been friendlier to C3 at every turn.

Of course, things always could get cozier. C3's partner in Lollapalooza is the William Morris Endeavor talent agency run by Hollywood super-agent Ari Emanuel, brother of former Chicago congressman and Daley fundraiser Rahm Emanuel, who resigned as President Obama's chief of staff last week to run for mayor of Chicago.

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Tomorrow: More on C3's relations with the music community in its hometown of Austin.

Earlier reports in this blog about Lollapalooza:

July 13: Lollapalooza, liquor sales, and the links to the mayor's nephew

June 29: What's behind the Attorney General's investigation of Lollapalooza?

June 24: Illinois Attorney General investigating Lollapalooza for anti-trust

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