Last year, a Menard’s home improvement store won a property tax appeal that required the City of Escanaba to refund the company $121,000. That’s about the cost of what the Upper Peninsula community of 12,000 on Little Bay de Noc budgeted for major street repairs next year.
Meanwhile, in Marquette Township, Lowe’s also won a $755,000 tax refund for its store. As a result, Marquette’s Peter White public library, the largest in the U.P., could no longer afford to open its doors on Sundays.
Across Michigan, communities – mostly small cities, townships, counties and schools – are losing costly legal battles with large retail stores. The companies behind the stores are successfully arguing to courts that they should be valued not by formulas that consider the cost to build them, but by comparing their worth to big box buildings that have been closed and sit empty; hence, the “dark stores” moniker.
The rulings have slashed property assessments of many retailers by more than half and left cities and townships with sudden gaps in their budgets. In some cases, towns have been forced to refund hundreds of thousands or even millions of dollars in tax revenue to businesses.
Now, other businesses are picking up on the tax-slashing strategy. Since last year, dozens of companies beyond the big-box behemoths have filed hundreds of property tax appeals across the state.
That in turn has prompted a bipartisan group of Upper Peninsula legislators to try to figure out a way to halt the tax breaks. They fear the trend could cripple local budgets that depend on property tax revenue and leave taxpayers across Michigan shelling out more for schools.
Sen. Tom Casperson, (R-Escanaba), is working with Rep. Ed McBroom (R-Vulcan) and Rep. John Kivela (D-Marquette) to counteract the recent court decisions. Casperson said he expects to introduce a bill soon after the fall legislative session begins in September.
A tribunal shapes policy
According to Casperson, the problem stems squarely from the rulings of the Michigan Tax Tribunal, a Governor-appointed panel little known to most Michiganders.
The five-member tribunal is the state’s tax court and has authority over assessment disputes, which mostly involve property taxes.
“Big box stores are starting to create a huge carve out for themselves and the Michigan Tax Tribunal is helping them,” Casperson said. “I get it. They have a chance to take the money so they’re doing it.
Sen. Tom Casperson, (R-Escanaba) is among a group of legislators trying to close the “dark stores” loophole in state law.
“The snowball has started. It’s going to spread, local business are going to say, ‘Why can’t I get the same thing?’”
But some business leaders argue that the state shouldn’t get involved in this issue.
James Hallan, president and CEO of the Michigan Retailers Association, defended the tax tribunal’s interpretation of how to value such properties. What’s important, he said, is for the court to determine “the objective value a property owner could receive in an exchange of property to any new owner.”
In the case of a large retailer like Lowe’s, Hallan and other defenders argue, the later sale of a building would be difficult because large retailers design the structures to fit their unique needs; in essence making them obsolete once the retailer moves out and problematic for resale. The state should reject “proposals that would give assessors more power than they already have,” Hallan wrote in a recent editorial.
Dark stores theory
In Michigan, property is taxed based on its assessed value, or 50 percent of its fair market value.
This is where it gets tricky.
Retailers argue that their buildings are worth far less than half the construction cost because they are built to be disposable, single-use big boxes that suit their business’ specific purpose. They contend that their stores should actually be taxed at the rate of comparable properties, by which they mean empty ones that are closed (or dark).
Critics of the dark stores strategy note that when big box retailers move out of a property, they often put a restriction on the deed that prevents any competitor from moving in. As a result, that property can remain empty (or dark) for long periods and lose yet more taxable value. Retailers point to the decreased value on deed-restricted properties and say that lower tax rate should be the standard for taxing stores that are open.
Menard’s convinced the Tax Tribunal that its Escanaba store – valued at $7.8 million for tax purposes – should instead be taxed as if it was sitting empty. Menard’s pointed to vacant property with restricted deeds as comparable properties for tax purposes. Its taxes on the Escanaba store were cut in half.
Lowe’s made a similar argument and the Michigan Tax Tribunal cut its taxes by about 55 percent at its Marquette Township store.
“It’s a self-imposed reduction of value right off the bat; (businesses) shouldn’t be able to do that,” said Scott Erbisch, administrator for Marquette County, which has paid out more than $1.5 million in property tax refunds this year to a handful of big retail stores.
Erbisch argues that when a taxpayer wins a reduction, it’s a cut to local government’s budgets that extends for years. Considering the Lowe’s example again, the taxes were cut from about $60 per square foot to $25, a rate that could take decades to return to the original level. That’s because under Proposal A, the school funding law passed in 1994, a property’s taxes can only increase by 5 percent a year or the rate of inflation (whichever is less).
Attorney Jack Van Coevering, former Chief Judge and Chairman of the Michigan Tax Tribunal, filed an appeal on behalf of Escanaba in the Menard’s case, arguing that when businesses are allowed to use properties with restricted deeds as comparables, they are gaming the system for avoid their fair share of taxes.
“There needs to be a uniform method” for assessing property, he said. “The Michigan Tax Tribunal is giving up a lot of money and I don’t think people realize it.
“This is largely a giveaway to out-of-state retail chains. Local businesses will pay more and when a big box decides to appeal and not to pay the state education tax, everyone else will pick up the tab.”
The impact on education
A portion of property taxes goes to the state education tax and when a taxpayer wins a property tax reduction, they pay less in state education tax. As a result, the state has to find somewhere else in the budget to backfill the state education tax revenue that is lost in these appeals so schools are not punished.
Denny Olson, supervisor in Breitung Township, an Upper Peninsula town in Dickinson County that lost a tax appeal to Home Depot last year, said he hopes the pinch to education will get people across Michigan to pay more attention to the dark stores issue.
“These big box stores or other corporate types of businesses come in and it’s to heck with everybody that’s been here 50 or 100 years paying taxes,” he said.
“They are able with their muscle to put our little business out of business and then come at the local unit of government and go for these big tax breaks. That is very unfair.”
Also in Dickinson County, the Quinnesec paper mill ‒ one of the largest taxpayers in the area ‒ filed for a tax appeal this year.
The mill has been located in the area for 30 years and employs about 400 workers. Mark Pontti, a spokesman for the mill’s owner, Verso Corp., said the paper mill’s tax appeal was not inspired by Home Depot’s successful appeal.
“We’re only seeking a fair and equitable valuation,” he said.
Rolling in the dark
Fair or not, these tax appeals are spreading.
Honigman, Miller, Schwartz and Cohn, the Detroit-based law firm that won the Lowe’s case in Marquette last year, has filed hundreds of new appeals on behalf of several big retailers statewide since 2014. The firm’s clients include Target, Walgreens and Home Depot filing appeals against such southeast Michigan communities as Southfield, Birmingham and White Lake Township.
Honigman spokeswoman Sue Sherbow, declined to comment on the appeals.
The volume and success rate in these appeals are sparking fears that copy cat cases will drain untold millions in property tax revenue from communities and schools.
The hundreds of appeals recently filed with the Michigan Tax Tribunal don’t include untold numbers of appeals filed with the local governments or settled before they get to the state level, said Randy Girard, manager for Marquette Township.
Small local governments often don’t have the money to pony up lawyer’s fees to fight an appeal from a big name retailer, Girard said, so they often negotiate a settlement.
“These businesses come in and reach agreement, they build and then all of a sudden, they want to reduce their taxes,” Girard said.
Fix the law, fix the problem?
Towns and counties could pass local ordinances to fight this phenomenon. They could prohibit the use of restricted deeds, or require that any new commercial buildings are constructed for multi-use or reuse. But state legislation would make Michigan’s tax policy more consistent statewide, say supporters of such a measure.
In Michigan, the dark stores appeals have mostly bedeviled small townships. But the fear of a wider application of this tax-cutting strategy has prompted other states, such as Indiana, to craft legislation aimed squarely at stopping a “dark store” stampede.
Indiana passed a law this year that requires tax assessments be based on the “cost approach,” or the cost of the building less depreciation and obsolescence. The law also forbids the assessment from being based on comparable properties that have been vacant for more than a year or have restricted deeds.
Indiana made the change after a study by the Association of Indiana Counties estimated that two big box property tax appeals in that state set the stage for assessed property values in Indiana to be decreased by more than $3.5 billion. That could have shifted $50 million in tax payments to other taxpayers, and cost governments and schools more than $68 million.
The Michigan Association of Counties said it did not have any such estimates for lost revenue on dark store tax appeals in Michigan.
Rep. Scott Dianda (D-Calumet), proposed a bill that would create a fee to recoup the amount of a taxes that companies have won in their property tax appeals.
Girard, manager of Marquette Township, said the current law is not the problem. The problem is the Michigan Tax Tribunal is refusing to adhere to current law and instead is allowing businesses to be taxed as if they are vacant, he said
At the same time, Girard said he is still a fan of the Dianda bill because it seeks to return the refunds to cities, townships and counties that have already lost tax revenue in these appeals.
“I don’t hold the businesses in a negative light,” he said. “I would’ve done same thing if the Tax Tribunal offered me that option.”
Rep. McBroom, however, said he believes Dianda’s bill is tantamount to a new tax and therefore is not likely to get any tractions in the Republican-led legislature.
A larger problem
At the end of the debate, elected and business officials agree, these tax appeals expose the flaws in the way local governments are funded in Michigan.
The state needs to look at municipal finance reform, said Robert Mahaney, president of the Veridea Group, which owns two retail shopping centers and a motel in Marquette Township, and supports the tax tribunal’s recent rulings.
Local units of government rely too heavily on property tax revenues and therefore some places are overtaxing businesses because it is their only source of new revenue, he said.
A few of his tenants, smaller mom and pop shops, have closed their doors in large part because they could not afford the taxes, he said.
For example, he said the Country Inn and Suites his company owns in Marquette is taxed at nearly double the rate per room as a similar hotel it owns in Houghton. “It’s supposed to be a property tax, not a profit tax,” Mahaney said.
Casperson disagrees that Michigan expects successful big box or other companies to pay more than is rightfully due in property taxes.
“They’re involved in the devaluation through their own actions (restricting deeds),” he argues. “Where does it stop? I would say it’s not going to stop. I think our tax tribunal has made it easier for them. We’ve got to make the assessment (process) very clear so there’s not a lot of wiggle room when it goes to the tax tribunal.”