When it comes to paying property taxes in Mason County, retailer Meijer Inc. appears to be following the advice of its old advertising slogan: “Why Pay More.”
In the past five years, the Walker-based grocery chain has lowered its property tax bills in Mason County’s Amber Township, east of Ludington, by appealing its assessment using what’s known as the “dark store” theory.
Meijer isn’t alone: Mega hardware retailers Home Depot Inc. and Lowe’s Companies Inc. have also used the theory to appeal their property tax obligations in Amber Township. Statewide, ”dark store” appeals have diverted upwards of $50 million from local government authorities, according to estimates.
Rather than peg their properties’ assessed values to the cost of construction to calculate property tax bills, the retailers argue their assessments should be based on those of comparable stores, oftentimes vacated, empty properties. The reasoning: Retailers build stores with their own unique design features, rendering them functionally obsolete when they open — thus the comparison to so-called dark stores with lower assessments.
So far, the five-member, governor-appointed Michigan Tax Tribunal has largely agreed and ruled in favor of the chains, leaving the local governments on the hook to pay back the retailers for over-taxing the facilities.
“We don’t believe that the dark store philosophy is a fair way of valuing stores, but the Tax Tribunal makes the decision,” said Mason County Administrator Fabian Knizacky.
Retailers’ use of the dark store theory has cost communities in Michigan approximately $74.3 million from 2013 through June of this year, according to new data from the Michigan Association of County Treasurers.
In a May op-ed in the Detroit Free Press, Michigan Association of Counties President and Allegan County commissioner Jon Campbell cited reports that property tax appeals in Ottawa County alone have accounted for a loss in revenue of $14.8 million since 2010.
That has lawmakers looking for ways to close what many see as a tax loophole that rewards “companies for gaming the state’s tax system,” as Rep. Steve Dianda, D-Calumet, described it.
WHAT IS COMPARABLE?
A handful of retailers, Target Inc. and Wal-Mart Inc. among them, have taken advantage of the court’s favorable rulings in appealing their assessments all over the state, according to multiple reports. The numerous government officials from West Michigan contacted by MiBiz for this report said they were aware of the dark store practice and continue tracking what it could mean for their communities.
The sticking point for many local officials stems from the retailers’ comparison of their stores to vacant properties. That’s because many vacant properties are “dark” for a reason: Retail owners often insert deed restrictions that block competitors from moving into their old facilities. The deed restrictions then artificially lower the transaction prices for the sales comparisons the big-box retailers want to use in appealing their assessments.
“Sometimes these big box stores have fairly unique designs and footprints for a building,” said Chris Hackbarth, director of state affairs at Lansing and Ann Arbor-based Michigan Municipal League. “It’s not like a local gas station or regular commercial establishment where anything can go in there.”
But Hackbarth argues it doesn’t make sense to use only sales comparisons to vacant stores in setting the valuation for a property that’s currently in use.
“How can you get comparable sales data when you’ve limited the use and basically superseded local zoning and master planning?” he said.
The costs to communities have been enough for groups like the Michigan Association of Counties to pay attention to the impacts of dark store theory in recent years. In 2014, the group stated that closing the loophole was one of its top legislative priorities.
Since 2007, big-box stores in Michigan have filed around 180 property tax assessment appeals with the Michigan Tax Tribunal, according to the Michigan Department of Licensing and Regulatory Affairs, which oversees the administrative court. The Tax Tribunal issued a decision in about 20 of those cases.
Although many communities appealed the rulings, the Michigan Court of Appeals has consistently affirmed the Tax Tribunal’s decisions, Moon added.
For municipalities, it’s easy to understand their frustration: The appeals take away funds from schools, libraries and other basic services, dollars they are unlikely to make up in an era of diminished state revenue sharing.
“What local units (of government) have seen is that these are permanent reductions in revenue bases that won’t come back,” said Jack Van Coevering, a tax policy attorney at Grand Rapids-based Bloom Sluggett Morgan PC.
Van Coevering previously served as the chief judge and chairman of the Michigan Tax Tribunal, and now frequently represents municipalities in property tax cases before the court.
In Mason County, successful appeals from Meijer, Home Depot and Lowe’s resulted in a loss of 0.3 percent of overall revenue for the county, according to Knizacky. The county has maintained an annual general fund budget of just under $12 million in recent years, according to public records.
“Anytime you lose revenue, it pinches the budget and makes things more difficult to do,” Knizacky said.
According to data from the Michigan Association of County Treasurers, the Tax Tribunal rulings resulted in refunds of more than $14.3 million in Kent County, $2.9 million in Calhoun County, nearly $1.6 million in Ottawa County and $265,000 in Kalamazoo County. Mason County also issued refunds totaling more than $430,000.
Officials at Meijer declined requests for a formal interview about its property tax assessment appeals strategy and instead provided MiBiz with an emailed statement.
“Meijer reviews each store’s assessment and appeals the tax valuations of our stores when we believe the values are overstated,” wrote Frank Guglielmi, senior director of communications at Meijer. “Our customers expect us to keep prices as low as possible and one way we do this is by managing our costs in the most effective way, which includes paying a fair and equitable level of property tax for our stores and facilities.”
Despite being just one big-box chain that utilizes the dark store theory, Meijer has gained attention nationally for its success in appealing its property tax assessments.
Last year, the Indiana Board of Tax Review ruled that a Meijer store on the northeast side of Indianapolis should have been assessed in 2012 at the equivalent of $30 per square foot instead of the $83 per square foot assessment set by the county, according to a January report by the Indianapolis Business Journal.
Marion County “could be on the hook for a $2.4 million refund to Meijer,” according to the report.
Following the Meijer case and an analysis from the Indiana Association of Cities and Towns (IACT), Indiana legislators took action, passing a law in July that curbs the use of dark store theory. Now, retailers must prove that their construction designs are unique, and the law prohibits properties with deed restrictions and vacant stores from being used for sales comparisons in determining assessments.
The new Indiana law is also retroactive to 2014, meaning Marion County might not have to issue a refund to Meijer, sources said.
Retailers’ successful use of the dark store argument in Indiana resulted in an “assessed value reduction of nearly $3.5 billion,” affected more than 17,000 parcels of land in the state, and resulted in estimated property tax savings of $120 million in one year, IACT noted in the February report.
Stakeholders say the Hoosier state example could serve as a good benchmark for a similar bill in Michigan to address a number of concerns municipalities face. The Michigan Municipal League and the Associations for Townships and Counties are working with state legislators to put an end to the loophole, Hackbarth said.
Representatives from the Upper Peninsula are particularly in favor of getting legislation passed because the small communities there are less able to absorb the loss in revenue when the Tax Tribunal rules in favor of a retailer.
An appeal involving a Lowe’s store in Marquette left the community on the hook to repay the company more than $755,000 in property taxes it was found to have overcharged the retailer. As a result of the retailer’s successful appeal, the city had to cuts its library hours, according to a June report by the Institute for Local Self-Reliance, an advocacy organization for local economies.
In June, Rep. Dianda introduced a bill that would create a user fee for retailers who use the dark store argument that would allow counties to recover lost revenue in the case that a company’s appeal was successful.
“Corporations need to pay their fair share for police, fire, and the other local services they demand,” Dianda said in a statement. “If these businesses want services and residents to shop at their stores, then they need to contribute their fair share back to the community.”
STRIKING A BALANCE
Regardless of whether legislation puts an end to the use of dark store theory in appealing property tax assessments in Michigan, many municipalities will still face the challenge of dealing with deed-restricted properties.
Many big-box stores put restrictions on the use of their former properties when they relocate to a newer, modern facility. Because the facilities are so large, the pool of potential users is already limited, sources said. The deeds typically restrict any kind of similar users from buying the property, meaning the sites typically go underutilized or sell for less than they would have as functioning retail locations.
That’s been true for the city of Muskegon and Muskegon County, both of which have dealt firsthand with deed restrictions on former retail properties, said Donna VanderVries, director of equalization for Muskegon County.
Target in 2007 closed its store on Sherman Boulevard and moved to a larger location in Norton Shores on Harvey Street near The Lakes Mall, while a former K-Mart store on Henry Street has been vacant for about a decade and is becoming a blighted property, VanderVries said. The deed restrictions on the parcels make redevelopment difficult because of the limited non-competing uses that can go into such large facilities, she said.
It’s an issue many communities around the state face, Van Coevering said.
“Everyone wants to encourage economic development, but then you get a retailer who puts a restrictive deed that is so severe that everything dries up,” he said.
In rural areas like Mason County where the big-box stores tend to be clustered in one area and serve regional markets, officials say they must strike the balance between the residents’ need for these retailers and the amount of revenue they contribute to the coffers of local government.
“I still think there is value to having the businesses in the community. There are jobs and there’s convenience for citizens to shop there,” Mason County’s Knizacky said. “There is definitely value, but we just have a disagreement on how much tax they should be paying.”
Editor’s note: This story has been updated with new data released by the Michigan Association of County Treasurers after the print edition of MiBiz went to press.