Legislature must close ‘dark stores’ tax loophole

Michigan’s local governments and schools are losing millions of dollars that otherwise would go to libraries, classrooms and police, fire and senior services through a gaping tax loophole large retailers across the state are quietly exploiting to lower their local property taxes.

Under the loophole, retailers such as Lowe’s, Wal-Mart, Target and Meijer across Michigan are seeking to have their “big box” stores that are open for business assessed for local taxes as if the stores were closed and vacant. The loophole was created in a 2013 decision by bureaucrats and political appointees to the largely obscure Michigan Tax Tribunal. The loophole has since become known as the “Dark Store” theory of determining tax assessments, and it has resulted in property tax assessments for big box stores being cut by up to 50 percent by these Lansing appointees. Bridge Magazine reported on the loophole back in early August.

This tax loophole is especially unfair to smaller businesses and homeowners, who are paying their fair share of taxes while having to give up community services because of these tax refunds stemming from Michigan Tax Tribunal decisions. A study of property taxes in Oakland County showed the average property tax rate for most retailers is now twice the average rate for big box stores — and significantly below the same rates they are paying for these same stores in other states.

Republicans and Democrats in the Michigan Legislature have joined to close the Dark Store loophole by introducing House Bill 4909 and Senate Bill 524 to advance the legislative discussion and ultimate resolution of this crisis.

Quick action is imperative, as big retailers across Michigan already have pocketed millions of dollars in local taxes refunded to them by cities, counties, townships, public schools, libraries and community colleges under the Dark Store loophole since 2013, according to a survey by the Michigan Association of County Treasurers. The bills would restore clarity and fairness to the assessment process and stop what has become a stampede of retailers asking for similar property tax cuts in communities all across the state.

Most communities welcome a Wal-Mart, Lowe’s or Home Depot. But they don’t expect those stores to then ask to be taxed as though they are closed when they are still open and making a profit off the local residents who shop there. Our simple goal is legislation to require that big box stores be valued and taxed in the same manner as any other Michigan storefront business and any other taxpayer.

Michigan’s municipalities, townships and counties have suffered tremendously over the past decade through the decline of state revenue sharing dollars and property taxes. Leaving local governments on the hook to refund millions of dollars in property taxes to big box retailers because of a tax loophole created by bureaucrats is robbing our communities of vital services.

Other states — including business-friendly Indiana — have passed laws or are working on legislative solutions to close Dark Store loopholes. The Indiana law recently passed on a vote of 98-0.

We urge Michigan lawmakers to support legislation that brings clarity and fairness to the assessment process.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Thu, 11/19/2015 - 9:47am
So “big box” stores that are open for business are assessed for local taxes as if the stores were closed and vacant. I'm guessing that most elementary school children know the difference between "open" and "closed". So who are these "bureaucrats and political appointees" who don't know the difference and why aren't they in jail? They've been complicit in allowing Corporations to steal MY money!
Thu, 11/19/2015 - 10:14am
This article begs for more information. What did the Tribunal base their decision on? They rarely make this stuff up.
Diana Menhennick
Thu, 11/19/2015 - 11:58am
Michael B. Shaprio is the mastermind behind this big box store taxation strategy. He wrote an article about this for the Michigan Assessors Assoication and I have provided the link for you here but you will have to copy and paste this into your browser. http://www.honigman.com/media/site_files/2042_The%20Michigan%20Assessor%... This strategy is solely based on greed and lack of a moral compass. Marquette County in the Upper Peninsula of Michigan has had to pay back over 1 million dollars in back taxes and services are now feeling the impact of this greed. There have been cuts to public libraries and the youth home is closing. This is just the beginning of the impact. The payouts are not only for the current year but back years with a time frame of 20 days for repayment. The lowered assessed values are kept the lowered level, which impacts the overall taxable value within not only a single jurisdiction but countywide. Some of these cases have been allowed to cut taxable value by 60% or more. This pro business tax climate is shifting the burden of responsibility of paying for local infrastructure, public safety and other services onto the property tax owners. This needs to stop!
Thu, 11/19/2015 - 10:50am
Is it possible the authors are very much over simplifying the issues and what is going on here? I believe I've seen this before. Could it be that the store's position is that they should be taxed on their physical construction and property only (the same way your home is taxed) and the municipality is trying to tax the businesses not on the property but as an income producing entity giving a much higher tax than the physical structures justify? This is in effect and in fact a stealth income tax and not a property tax. Strangely they don't try to apply the reverse of this when a property/business is losing money. Where did they get this right from? From watching the Michigan Municipal League in action they seem to always be looking to find ever more inventive ways to extract more money from anyone they can find and that will sit for it.
Jim V
Thu, 11/19/2015 - 1:45pm
Or perhaps it's possible that the law is intended to make the big guys pay at the same rate as the little guys. It has nothing to do with income and everything to do with real value. So, it's possible that they are just leveling the playing field.
Thu, 11/19/2015 - 11:07am
Sounds to me like Bridge is advocating for legal larceny from certain stores. Property tax should be based on only the assessed value of the structure. If a store costs $2 million to build, then it gats assessed at roughly $1 million. Because it is a commercial property, it also gets to pay a higher millage rate than homestead property. The real problem seems to be the granting of tax incentives. Do away with that and there should be enough revenue to keep everyone happy. Whoops. My bad. Politicians are never happy with the amount of tax revenue they have and always want more. If you really want something to report on, how about looking at the unfair taxation of non-homestead residences. These are mostly owned by limited income retired people. I say unfair because the owner can not even vote in the millage elections affecting his property. I think the colonies went to war in 1776 for something very similar.
Jim V
Thu, 11/19/2015 - 12:58pm
Matt & Rich You fellas need to get all the facts. The big-box owners are taking full advantage of their legal departments and have convinced the governor-appointed Tax Tribunal to lower their fair assessed value (the way small businesses are appraised). They have successfully argued that since their stores are built specifically for their purpose, that they wouldn't be able to sell them for what they've invested in them (essentially saying that they are disposable). The problem is that most, if not all, of these stores put a restriction on the deed that prevents any competitor from moving into it, thereby lowering it value. Then the retailer uses the decreased value based on deed-restricted properties to say that the lower tax rate should be the standard for taxing stores that are open. Sound convoluted? Well it is. These stores should be taxed as an open store while they're open. If they close, then the property could be taxed at the lower, "Dark Store" rate. All this, while small businesses are forced to close up shop.
Thu, 11/19/2015 - 1:20pm
Thanks to the comments, I have a better understanding of this situation, but the article is surprisingly vague (which I think is unusual for Bridge). The article didn't explain how the commission actually decided this. I would like more information.
David L Richards
Thu, 11/19/2015 - 4:42pm
The article (along with an article cited by another commenter) does not explain what I have read previously to be the problem. Big box stores do not want competitors to take over their former locations. Accordingly, they place restrictions on the future use of discontinued big box stores by their competitors. When properties with those restrictions are placed for sale, they are not available to the most likely buyers (their competitors), and therefore, the market price is artificially lowered. It is like putting your house up for sale, and ensuring that prospective buyers can't use the garage or the back yard after the purchase. The sales price will be markedly reduced, and the price obtained for your house will not reflect its true cash value. The prices used for comparables in setting assessed value of big box store properties, therefore, do not truly reflect actual cash value because the seller is not selling the entire interest in the property, and that value, although artificially reduced, is being used by the Tax Tribunal. This is simply a summary of my understanding previous articles on the topic, and I do not claim it to be authoritative.
Steve Manor
Thu, 11/19/2015 - 5:30pm
David is 'right on'.
John Q. Public
Thu, 11/19/2015 - 8:14pm
"Michigan’s local governments and schools are losing millions of dollars that otherwise would go to libraries, classrooms and police, fire and senior services through a gaping tax loophole large retailers across the state are quietly exploiting to lower their local property taxes." Such a complaint is richly ironic coming from Gilmartin. The MML is THE biggest proponent of tax increment financing in the state, which results in the exact end he complains about here. Wait--I stand corrected. The end result isn't exactly the same; local governments and schools lose HUNDREDS of millions to tax increment financing.
David L Richards
Sun, 11/22/2015 - 12:34pm
And they gain hundreds of millions of dollars from taxing the economic development resulting from investment made with tax increment financing.
John Q. Public
Sun, 11/22/2015 - 1:58pm
That's an effective counter as long as you believe no economic development will ever take place without tax increment financing. It's the argument made only by the entities doing the capturing. You never hear the budget directors of the jurisdictions whose taxes are captured testifying about what a financial boon TIF has been to their top line. Why does no taxing jurisdiction having its property taxes captured lobby for more TIF if it's so beneficial to them? Mr. McGuire's organization, for example, has appeared before legislative committees, newspaper editorial boards and various civic groups to lobby extensively for TIF reform. While I don't speak for them, they don't seem to think it's a very good deal.
Fri, 11/20/2015 - 1:06pm
If these stores are being taxed as of the are closed. Shouldn't they be required to show that all goods sold in these stores are being sold at prices that are less than their cost? Why don't we require that any buildings being taxed as a "dark building" must have all entrances to the property, except one emergency entrance, be closed off by "jersey" barriers? Thus, limiting any "empty dark building's" risk of vandalism. Businesses which want access to roads and residents of the community must pay fair taxes to secure them. This problem extended to industrial property as well. The legislation should simply establish business property should be taxed at a replacement cost unless the building is actually closed, shuttered, and is empty! The law needs to define exactly what a "black building is." We travel a lot, our neighbors spend winters in the south or southwest, why can't we claim that our homes "black houses" and have their tax values lowered at least the percentage of the year we aren't using them. The same should apply for "recreational" property (family cottages, hunting camps, etc.). I can't believe the tax cutting, "fair tax" GOP hasn't made this change already! Oh wait, this would benefit the 99 percent! We expect them to act in our interest and unlike the 1 percent we don't buy their vote, so we don't count!
Sat, 11/21/2015 - 12:25pm
The authors must have slept through their english and economic class in high school. The tax is a tax on property not on business activity. You cannot apply a tax on real property to business activity. The rest of the article is pure left wing b-s. Typical of the business destroying crap that comes out of the peoples republic of AnnArbor.
Steven Norton
Sun, 11/22/2015 - 10:24am
Perhaps you should try reading the article, or at least the comments? They are talking about returning to the status quo as of three years ago, when big box stores were doing just fine. The tax is not on economic activity, but on a property's true value rather than an artificially deflated one. If I build a $5 million mansion, but implement a deed restriction that any future owner can only use it for a toxic landfill, should I be able to claim that my mansion ought to have the taxable value of a SuperFund site? Even if I do not foresee moving in my lifetime? And as to "business destroying crap that comes out of the peoples republic of AnnArbor [sic]," well, then the Ann Arbor area economy must be a wasteland mired in recession. But, wait.....
J. Andrew Hoerner
Thu, 06/30/2016 - 12:52am
Michael Shapiro's article raises some interesting points about the proper valuation of properties that have been built to suit the purposes of a particular owner. He maintains, correctly, I think, that when a property is peculiarly or uniquely valuable to its current owner, then normal valuation rules do not assume that that those special values will be maintained if that property were to go on the market. All valuations are based on counter-factuals: the value that a purchaser would or should be willing to pay under circumstances that we believe are representative of a fair, arms-length exchange. The counterfactual situation that forms the basis of the normal valuation rules assumes that the property has been placed on the market to be sold to a purchaser other than its former owner, as when the previous owner dies, goes bankrupt, shuts down its operations in the state, or the like. In fact, I think that Shapiro's best argument is that big-box store operators are now going out of business or building smaller stores, and that the existing big-box stores are archaic behemoths and hence doomed. Under those facts, the valuation rule he proposes seems quite reasonable and consistent with the general principles of valuation. Of course, these economic facts were naked assertions. In fact, for an article by a lawyer aimed at fellow professionals rather than potential clients, this piece was quite remarkably devoid of any hint of supporting evidence or factual support. I see the piece is fairly informal, but it is unusual to avoid even a single concrete fact or anecdote, if only for color. Was that a choice imposed by the style guidelines of the publication? I am afraid I have not read it previously. If, however, big box stores are continuing to thrive and earn normal rates of return for their owners, I think those same general principles dictate a different valuation rule than Shapiro suggests. We assume, after all, that big-box store builders and operators invest in such modifications as they do because those modifications improve and increase the value of the property and earn the owner(s) at least a normal return on their investment. Any alternative owner would do the same -- with different unique investments, but investments of the same general type. So one way of setting up the market sale counterfactual is to imaging another big-box store operator had constructed a similarly-sized facility on the same location to its own specifications. This rule would recognize that the special features of each constructed-to-order store may be unique in their precise specificity, bur are generic in their general nature. But I think another framing specifies the correct rule more clearly and unambiguously. In general, standard principles of evaluation require that property be valued based on its highest and best use. We look for how valuable a property would be to the highest bidder on an open market, not on what it would be worth to the second, or fifth, or hundredth-highest bidder. And indeed, when the current owner has died or gone bankrupt, that implies that the sunk cost in investments of peculiar utility to the former owner has been lost, just as Shapiro emphasizes. But when the current owner is alive and kicking, and continuing to do business in the state; and when the site selection and the exact features of the building were in fact the voluntary choices of that ongoing business, acting in what it believed to be its best interest; under those facts, I think the presumptive valuation should be based on the following counterfactual: Suppose this exact property, exactly where it is, built in precisely the way it has been built, were to come on the market, sold by a canny hypothetical owner at arms-length to the highest bidder. What would these hypothetical owner(s) conclude to be the building's highest and best use? Who should these owner(s) anticipate would be the highest bidder? How would these hypothetical owner(s) estimate the value of the property to that bidder when selecting a reservation value for negotiation and pricing? It seems to me undeniable that under these circumstances the highest and best use is its current use. The most probable highest bidder is the current owner. Who else would value the exact installed set of features so highly? The hypothetical alternative owner would value the property fo pricing purposes by trying to put themselves in the shoes of the current owner, and asking what the facility would be worth to that owner, if it had to buy it back. Of course, if Shapiro's assertion that big-box stores are losing propositions and rapidly collapsing is true, then some of the value invested in the store constitutes a sunk loss, that the current owner would be unwilling to pay if it were put in the position of having to buy the store back in order to operate it. And the current owner should be allowed to try to establish this to the assessor, by an appropriate net present value analysis under the normal rules for valuing ongoing businesses. Allow me to suggest a simple acid test. Let the the business valuation proposed by the current owner in such a proceeding be irrebuttably presumed to be a fair market price under a condemnation proceeding by some appropriate revenue authority, at that authority's sole discretion. If the current owner's attorneys have correctly represented the current owner's valuation of that property, then those owners should be very happy to have this collapsing venture taken off their hands so that their potential competitors can be stuck with the losses. If, however, the "dark stores" valuation rule grossly understates the property's value to it's current owners, well, I expect the current attorneys would have to find themselves another client.