IN DEPTH: ‘Dark stores’ tax fight heads to Capitol

March 2, 2019

With national retailers and municipalities at odds over tax bills, legislators are working to clarify the rules for assessing big-box stores’ value.

Chains such as Walmart, Walgreens and Menards have sued municipalities across Wisconsin – and in other states – over their property tax assessments. They claim their stores are built to suit only the original tenant and, because they’re obsolete the moment they open, should be valued as if they were empty buildings, not active businesses.

Municipalities bemoan the so-called “dark stores” approach as a tax loophole retailers exploit at other taxpayers’ expense. When retailers get their property tax assessments reduced, it creates budget gaps that force municipalities to compensate.

“Every time they do that it puts a hole in the budget,” said Baraboo Mayor Mike Palm, whose city was sued by Menards over its tax bills. “It hurts the residents when that happens.”

Meanwhile, those businesses continue to receive municipal services.

“It’s still a structure that requires fire protection, police protection,” said Portage City Administrator Shawn Murphy.

Walmart contested its assessment in Beaver Dam, prompting a settlement with the city that lowered its tax bill.

“Putting that on the back of taxpayers when record profits are being made is hard to stomach,” Mayor Becky Glewen said.

Some courts have sided with retailers, others with municipalities. Municipal leaders and taxpayers have called for legislators to change or at least clarify the rules on how assessors should evaluate big-box stores. In November, 23 municipalities approved referendums asking the governor and Legislature to close the loophole. New Gov. Tony Evers vowed to do so in his proposed 2019-20 budget, but didn’t mention it during Thursday night’s address to the Legislature.

“This needs to be clarified legislatively, because the courts are going the other way,” said Rep. Dave Considine, who represents Baraboo and Portage in the state Assembly.

But Illinois real estate appraiser Mike Marous, whose clients have included municipalities and retailers, said the free market – not lawmakers or judges – should dictate how big-box stores are assessed.

“The market will bear it out. That’s the right way,” he said. “When the oversupply ends, the prices will go back up.”

Retailers’ perspective

Critics claim retailers are exploiting a loophole to shift the property tax burden onto everyday homeowners. But Marous said retail chains aren’t crying wolf. Online shopping has reduced brick-and-mortar retailers’ market share, prompting store closures. Supply of big-box buildings is greater than demand.

“You have to adapt to the realities, the changes in the market,” Marous said.

Retailers build stores to fit to fit their unique operations, making them difficult to sell or rent once they’re vacated. And in cases where a retailer relocates to a new building nearby, it’s unlikely to rent to a competitor: One home products chain isn’t going to welcome a competitor into the market by renting to another. This factor depresses stores’ market value.

“None of these guys want each other’s stores,” Marous said.

Under Wisconsin rules, assessors are directed first to consider recent sales of comparable properties when evaluating properties’ value, but they also may consider construction cost and a building’s ability to generate income.

Minnesota tax expert Mike Wedl, who has worked on behalf of Walmart and Menards, said assessors shouldn’t base a store’s value on the revenue it generates. That would be like assessing a home based on the owner’s income.

“It doesn’t demonstrate what the market is willing to pay,” Wedl said.

He said courts have ruled correctly when they’ve adjusted assessments where stores were treated differently than other properties.

“They’re doing nothing different for big boxes than they are for any other property type,” Wedl said. “There’s no loophole.”

Impact on municipalities

Municipal leaders don’t share that view. Many, such as Baraboo, Beaver Dam and Portage, have asked legislators to close the “dark stores” loophole. Murphy, the Portage administrator, said retailers are unfairly pushing the tax burden onto homeowners and other taxpayers. According to the League of Wisconsin Municipalities, since 1970 the burden borne by homeowners has increased from 51 to 67 percent. Business’ share has decreased proportionally.

“There’s a cost for (services), and they should pay their fair share and not shift the burden,” Murphy said.

Menards sued Baraboo multiple times over its tax assessments, prompting the city to return more than $15,000 in a settlement covering the home product chain’s tax bills for 2015 and 2016. Last summer, Mayor Palm was among scores of municipal leaders who testified at the Capitol in favor of bills that would close the loophole. Those bills were opposed by business groups such as Wisconsin Manufacturers and Commerce. The bills didn’t make it out of committee, as they weren’t scheduled for votes.

Palm said he hopes citizen outcry, as evidenced by last fall’s referendum results, will spur action during the upcoming legislative session. “I think if it’s going to happen, it’ll happen this year,” he said. “There’s a lot of support in the state by the taxpayers to get this loophole closed.”

State Sen. Scott Fitzgerald, R-Juneau, said he hopes a legislative study committee’s recent recommendations on the issue will become law. These include allowing assessors to value properties based on the income they produce when comparable sales are absent, and requiring property owners to provide the data assessors need.

“Moving forward, Senate Republicans will hope to include some of the committee’s ideas in our discussions as we continue to look at what the best solutions are to this complex problem,” said Fitzgerald, who represents Beaver Dam and is the Senate’s majority leader.

Prospect of lawsuits

Palm said clarifying the rules for big-box stores could prevent further litigation and budget surprises. “You can’t budget for the amount of a lawsuit,” he said.

Rep. Considine said retailers hold an advantage in court because they have lawyers on retainer. “They have a whole lot more power with attorneys,” he said. “(Municipalities) can’t afford to fight them.”

Glewen said Beaver Dam opted to settle with Walmart rather than fight in court because it didn’t want to throw good money after bad.

“Resources are stretched already for communities,” she said.

Possible ramifications

Tax expert Wedl said voters have been misled by biased coverage of big-box stores’ tax assessments.

“It’s being misrepresented,” he said. “The articles I read are largely skewed.

“If I’m a voter and that’s all I know, I know how I’m going to vote.”

He said those who voted for referendums supporting change should be careful what they ask for. Wedl predicted properties of various types could see their taxes rise if they’re valued based on their ability to generate income.

“Suddenly everybody’s values are going to skyrocket,” he said.

Real estate appraiser Marous bristled at the idea of lawmakers changing the definition of market value. “You’re just going to have a mess all the way downhill,” Marous said. “There’s a lot of money in jeopardy.”

Without a legislative remedy, Glewen predicted other retailers – in addition to national chains – will start challenging their tax assessments. That could mean less money for schools, police protection and road work.

“I think we’ll continue to see that,” she said. “We’re just asking them to be a partner in our community.”