Dark store tax fight not going away soon
HOUGHTON — Menards is the nation’s third-largest home improvement chain, behind Home Depot and Lowe’s, according to Forbes. Its stores sell lumber and home improvement products such as hardware, tools and paint. Menards is also involved in residential real estate development, with several large subdivisions under construction and development in Indiana and Illinois. Founded by John Menard Jr., Menards is ranked the 37th largest private company in 2019, with 2019 revenue reported at $10 billion by Forbes.
Yet, in spite of that revenue, an Upper Peninsula Menards began battling the city of Escanaba over a tax evaluation issue in 2014. The retailer won a Michigan Tax Tribunal appeal that significantly reduced its property value, and in turn lowered tax revenues for government entities including municipalities, schools, colleges and others that receive tax funding, stated a May 17, 2018, edition of the Marquette Mining Journal.
Menards claimed that the store’s value should be based on a closed and empty, or “dark store,” building. As a result of the tax tribunal ruling, Escanaba had to adjust Menards’ 2012 property value for its 166,196-square-foot building on 18 acres from $48.43 to $20 a square foot, the 2013 value from $49.54 to $21 a square foot, and the 2014 value from $50.88 to $22 a square foot, the Journal reported. The ruling forced the city, county, Bay College, public schools, and other agencies then to reimburse property taxes previously paid by Menards.
The tax appeal required Escanaba to refund the 37th largest private company in the United States $121,000, while in Marquette Township, Lowe’s won a $755,000 tax refund for its store. The tribunal’s ruling in that dispute forced Marquette’s library to eliminate its Sunday hours in order for the township to pay its share of the refund.
The city of Escanaba rejected the tribunal’s ruling, and continued to fight the decision, and in the spring of 2017, the Michigan Court of Appeals issued a decision in favor of the city. In response, Menards filed a request to have the case heard before the Michigan Supreme Court. As the court declined to take the case, it was returned to the Tax Tribunal.
Since 2013, 41 counties have had to refund at least $47 million in tax appeals, according to a survey published by the Michigan Association of Counties. The refunds were not all related to big box stores, but it was the dark stores controversy, and growing numbers of appeals that led the organization to release the survey. Last year, the dark store loophole fight moved to the Michigan Legislature, with bills in both chambers seeking to close the loophole, reported the Daily Press, on Jan. 21, 2019. Representative Beau LaFave introduced a bill the House to address the problem.
The Daily Press reported that according to LaFave, many big box stores not only put deed restrictions to their own properties, but will also use the property values of other, vacant, deed-restricted properties as part of a market analysis to claim their taxable value should be significantly lower than it was originally assessed.
The Daily Press reported that the House bill dictates the tax tribunal must reconcile the method of valuation used by the assessor who initially assessed the property as well as capitalization of income (a commonly used appraisal formula that figures in income from a property), cost less depreciation, and comparable sales. Comparable sales that are subject to deed restrictions may not be usable if those deed restrictions cause a substantial drop in value from the “highest and best use,” the use that would provide the highest value for the property.
However, not everyone supports the proposed legislation. At a 2019 stakeholder meeting, representatives from the Michigan Chamber of Commerce and the Michigan Retailers Association spoke out against the bills.
According to a Feb. 3, 2019 article in MiBiz, Dan Papineau, director of tax policy and regulatory affairs with the Michigan Chamber of Commerce, which is “strongly opposed” to the bills, said the bill is trying to force a decision out of the tribunal that will be more in their favor.
“We’re justified in our right to appeal over-assessments,” Papineau is quoted as saying, “and that’s what’s happening — we’re winning.” MiBiz provides business news for Grand Rapids, Kalamazoo, Battle Creek, Muskegon, Grand Haven, Spring Lake, Holland and Saugatuck.
It is difficult to determine the exact amount local governments have lost in revenue from the dark store theory. MiBiz reported in 2016 that it had cost municipalities about $100 million over the previous three years.
Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League, told MiBiz that the Tax Tribunal has historically discounted other methods of valuation and only did sales.
“It has allowed for comparison of sites out of the state and in different economic conditions that were blighted and vacant for years,” Hackbarth is quoted as saying.
Additionally, the Tax Tribunal has allowed deed restrictions to factor into the value, which critics say can artificially lower the value of properties.
State Rep. State Rep. Julie Brixie, D-Meridian Township, represents a district east of Lansing, which includes Okemos, a regional shopping center with several big-box stores. Formerly Meridian Township’s treasurer, MiBiz stated, Brixie watched the dark store issue unfold more than (six) years ago. In one case, the township lost $1.2 million in tax revenue over two years based on one dark store assessment. She is reported as saying that total statewide cost has likely passed $1 billion.