Walmart Inc. applied the dark store theory in 2018 to appeal the tax assessment for its store in the city of Grandville. The city settled with Walmart, reducing the store’s taxable value from more than $8.6 million to $7.65 million. Walmart Inc. applied the dark store theory in 2018 to appeal the tax assessment for its store in the city of Grandville. The city settled with Walmart, reducing the store’s taxable value from more than $8.6 million to $7.65 million. PHOTO BY: SYDNEY SMITH

Municipalities hope for legislation on dark-store loophole

BY Sunday, August 18, 2019 06:20pm

When Meijer Inc. last month nearly halved the taxable value of its 195,000-square-foot store in Marquette just a year after it opened, the move set off an outcry from advocates for local government. 

The Walker-based supercenter retailer had successfully used the so-called “dark store” theory to argue that the taxable value of its store should be based on property values for nearby closed or vacant stores. The reason: Meijer and other retailers argue their facilities feature unique designs, rendering them functionally obsolete after they open.

When retailers take their disputes to the Michigan Tax Tribunal, Michigan communities are often forced to settle cases instead of taking them through a costly trial. Officials argue that either way they’re left with less revenue to fund public services.

“It takes away from our municipality, our fire department,” said Scott Hess, superintendent of Comstock Township, where Menard Inc. won a Michigan Tax Tribunal case that reduced the township’s revenue by almost $60,000 in 2018 and 2019 combined. 

“Those are the impacts big box stores have when they contest their assessment,” Hess said. 

According to the Michigan Municipal League, prior to the dark store theory, big box stores in Michigan were assessed at an average rate of $55 per square foot.  That number has dropped dramatically in recent years. 

Today, Lowe’s stores are now assessed at about $22.10 per square foot, while Menard’s and Target centers are valued at $24.97 per square foot, according to the MML. 

The retailers’ practices have drawn the scrutiny of officials and observers across the state, particularly in more rural areas that struggle to meet the increased demands for services stemming from the big box stores. 

The outcry has been most acute from communities in Michigan’s Upper Peninsula, where the Iron Mountain Daily News, in a July 8 editorial, called the dark-store loophole a practice that has “spread across Michigan like a cancer. Something needs to be done.”

“We can appreciate the low prices, but it could be at the expense of our pocketbooks should new or higher millages be proposed to shore up funding for the services we’ve come to expect from our local governments,” the editorial board wrote. 

As the big box tax disputes continue to ramp up, municipalities and community advocates hope bipartisan legislation in Lansing will make a difference in curbing the dark-store loophole. House Bills 4025 and 4047, with more than a dozen co-sponsors, were introduced and referred to the Committee on Local Government and Municipal Finance in January. Senate Bills 26 and 39, which are sponsored by both Democrats and Republicans, have yet to have a hearing after they were introduced in January.

Local government advocates, including the Michigan Townships Association (MTA), hope legislators will hear the bills this cycle because the loss of revenue from the big box stores is affecting services in Michigan communities. 

“We have had communities that may have spent millions of dollars to extend services to a commercial area where big box stores want to locate, only to have their assessed values reduced extensively,” said Judy Allen, director of government relations at MTA.

MTA’s goal is to have the state pass legislation that would require the Tax Tribunal to look at the three standard models used to estimate property values. These include reviewing the sales prices of comparable properties, along with estimating the cost of the building while accounting for depreciation. Another is based on the income a property generates. Retailers have used dark store theory to argue against the income approach in favor of the comparable sales approach. 

“It puts assessors in a very awkward situation, because it almost goes against everything that we were trained in assessing and appraising property,” said Charles Decator, city assessor in Grandville.

The MTA remains hopeful the legislation and a dark-store case pending in Escanaba could set a precedent for how the cases are handled in the courts, Allen said. Escanaba in 2016 won a tax dispute with Menard’s in the Michigan Court of Appeals, which said the Tax Tribunal should consider other factors in determining the assessed value. 

“If you have a store that’s going out of business and it’s vacant, they would say that their store should be valued similar to a store of that size that had closed,” Allen said. “You could have a store that was brand new, not even open, claim they should be valued as if somebody had gone out of business.”

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