Bipartisan bills: Michigan lawmakers take fresh aim at 'dark store' taxes

Local governments and retailers have disagreed over the proper way to assess big-box stores for property tax purposes. Reintroduced legislation in Lansing intends to change the process.

Michigan lawmakers are taking another run at closing what they call a tax loophole that has allowed big-box retailers to lower their property tax assessments by comparing the value of their facilities to empty, shuttered stores.

Proponents of the so-called “dark stores” legislation, introduced in the early days of the new legislative term, say the bills are in response to a flurry of local property tax appeals between local governments and retailers that resulted in municipalities having to refund tax payments to companies, at the expense of using those tax payments to fund roads or expand public library hours.

Bipartisan breakthrough bills

With Michiganders clamoring for Lansing to set aside partisan differences, state lawmakers are speaking optimistically about finding bipartisan solutions in the new legislative session. Bridge Magazine is watchdogging those efforts by highlighting bills that died in past years but appear to have broader support in 2019. Please send Bridge reporters other suggestions for legislation we should be following. Related stories:

Local governments contend that’s because big-box stores have convinced state tax judges that the value of their properties can be decided by comparing them to stores that have closed, rather than to the cost to build a new one. They point to examples in Escanaba, which won a tax dispute with Eau Claire, Wis.-based Menard Inc. in the Michigan Court of Appeals, and in Kalamazoo County, where Oshtemo Township leaders and Issaquah, Wash.-based Costco disagreed on the value of a newly constructed store.

In the Escanaba case, which local government leaders across Michigan are watching, the city had to refund Menards $121,000, part of $421,000 the company won back from various government entities in Delta County.

Retailers counter that closed stores are a fair comparison because retail buildings are designed for a specific user and have a limited market for re-use, making them essentially obsolete once that retailer leaves.

Past legislative efforts have failed to advance to the governor’s desk. Retailers and other business groups oppose the proposal, and they have had support from Republican legislators who saw the measures as harmful to business.

This year’s bills, like one that made it through the House in 2016, have bipartisan support; the House version has a number of co-sponsors from both parties.

“I don’t blame any of the big stores who are doing this for doing this,” said state Sen. Ed McBroom, a Republican from Vulcan in the Upper Peninsula’s Dickinson County, who sponsored the new Senate bills.

But, McBroom added, big-box retailers use public services, from police and fire to wastewater management, and lowering their property tax obligations reduces the amount of revenue local governments have to provide those services.

“For (retailers) to not be fairly participating in the support of the community that they move into is just not right,” he said.

Tax Tribunal stirs action

Property in Michigan is assessed for tax purposes at 50 percent of its market value. Disputes over property tax assessments are handled by the Michigan Tax Tribunal, the state’s tax court, whose members are appointed by the governor. Property values are estimated using three standard models, including reviewing sales prices of comparable property, as well as estimating the cost of the building while accounting for depreciation.

“We have to base our assessment on market value,” or the selling price, said Dan Papineau, director of tax policy and regulatory affairs for the Michigan Chamber of Commerce, which opposes the bills.

“The comparable approach is the most likely to yield true market value,” Papineau said. “What something sells for is what it’s going to be worth.”

Yet retailers have been winning property tax appeals that base their property values on comparable properties that include deed restrictions prohibiting particular uses, including retail, said Rep. Beau LaFave, R-Iron Mountain, who sponsored one of the bills in the House.

That can artificially lower the property’s value, he said, because it limits potential buyers and does not reflect the highest and best use for the building.

The pending legislation generally would prevent the tribunal from considering comparable sales that include deed restrictions that would limit potential reuse or could contribute to the property sitting vacant.

“I’m certainly not outlawing deed restrictions,” LaFave said. “My legislation just says that if they are going to use properties as comparables that have deed restrictions, they cannot have significant impact on the valuation of a property.”

Amy Drumm, vice president of government affairs for the Michigan Retailers Association, said the legislation would create so many limitations on using comparable sales when determining property values that it essentially would no longer be an option.

“You’re going to be hard-pressed to find a lot of comparable sales that don’t have restrictions on them,” Drumm said. “Beyond that, we worry that it increases the cost and length of the appeals process.”

She said the association’s retail members believe their property tax assessments have been too high, and the current appeals process is working. The bigger problem in need of a solution, she said, is the revenue squeeze affecting local governments.

Drumm said new retail buildings are similar to new cars that depreciate in value once they’re driven off a sales lot. They’re built to suit a particular retailer with specific floor plans, she said, so a future buyer would have to spend money to renovate the building to meet its own specifications.

That idea doesn’t make sense to state Rep. Julie Brixie, D-Meridian Township, a former township treasurer and a bill sponsor in the House.

“It’s just patently ridiculous to think that a store that just opened is functionally obsolete,” said Brixie, who said local governments in Ingham County lost more than $1 million over a two-year period in reduced property taxes to retailers while she was a local treasurer.

In 2016, the Michigan Court of Appeals sided with Escanaba in its battle with Menards, ordering the Tax Tribunal to reconsider Menard Inc.’s tax assessment because it did not consider the highest and best use for its store. It ordered the tribunal to reconsider its earlier decision, which the tribunal is expected to release this year.

That means no new precedent will exist as to how big-box stores should be valued until the Tribunal’s decision comes back, or until the Legislature acts, said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League, which advocates primarily for cities and supports the legislation.

“You’ve got these (bill) sponsors who are saying, ‘It’s the Legislature’s job to create the laws. We’re not going to sit around and wait for the court to try to make laws,’” Hackbarth said.

The last serious effort was in 2016, when a Republican-sponsored bill with bipartisan backing passed the state House by a wide 97-11 margin. It stalled and later died in the Senate finance committee, led at the time by former state Sen. Jack Brandenburg, of Macomb County’s Harrison Township.

Brandenburg, who was term-limited out of the Legislature in 2018, told Bridge he prevented the bill from leaving his committee because he didn’t believe it would help retailers that employ thousands of Michiganders and inject millions of dollars into the state’s economy.

“When I came into the Senate, I made it very well known that I was very pro-business, and this legislation is not pro-business,” said Brandenburg, who owns a company in Fraser that sells fasteners and other industrial supplies. “That’s why I buried it.”

Proponents said they are optimistic the new bills could gain momentum this term. The Senate finance committee is now chaired by Sen. Jim Runestead, R-White Lake, who voted in favor of the 2016 effort while he was in the House.

Runestad said he has not yet read the new bills and doesn’t yet have a position on them, but said he will give them a thorough look as committees begin to meet.

McBroom and LaFave said they aren’t wedded to the language as written and hope to work with all interested groups, from municipalities to retailers, on a compromise.

The bills are Senate Bills 26 and 39, and House Bills 4025 and 4047.

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Comments

David Andrews
Tue, 01/29/2019 - 9:24am

Perhaps the problem is not in how the viable stores are taxed, but how shuttered stores are taxed. When establishing the value of a shuttered store, perhaps it should be compared to and taxed the same as that brand new shiny big box store that drove the shuttered store out of business.
Perhaps a property should not be taxed based on what it sells for, but based upon the total square feet and the number of people living near the store
Store Value = Square feet * (AN1 + BN2 + CN3)
where N 1 is the number of people within 2 miles of the store, N2 are the people living 2-8 miles from the store, and N3 are the people living 8-15 miles from the store, and A, B, & C are state assigned coefficients.

This formula would apply to every retail facility in the state. Shuttered stores would use this same formula except that A, B, & C would be set at lower values.

Matt
Wed, 01/30/2019 - 10:56am

Yep square footage! With additional classifications or factors based on how many people work or interact there so it reflects the costs to the community to recoup costs instead of people living near by (way too complicated). Office building or factory has a much higher cost on community resourses than many warehouses. Then do homes the same way. Never will happen gives away too much power.

David Waymire
Tue, 01/29/2019 - 9:43am

“When I came into the Senate, I made it very well known that I was very pro-business, and this legislation is not pro-business,” said Brandenburg, who owns a company in Fraser that sells fasteners and other industrial supplies. “That’s why I buried it.”

And this is the problem...we have been "pro-business" for about 25 years in this state, cutting business taxes dramatically. In that time, we have seen cuts in education, infrastructure and municipal finance funding. Doing so has made it impossible to attract and retain the best talent in our state....and that's why per capita income has plumetted from 19th in the nation to 32nd, our unemployment rate is 30th in the nation, and businesses now complain they can't find enough talent. States that rank high on "business climate" indexes rank low in quality of life and per capita income indexes....and interestingly, low in the number of millionaires living in those states per 100,000 residents.

Subee
Tue, 01/29/2019 - 12:06pm

These cheap behemoths that litter our landscapes when they close should pay business taxes comparable to any other business. We only seem to get businesses looking for cheap labor; not the types that are here to grow (our subpar schools and roads keep them out). Traverse City allowed Hobby Lobby to build next door to a Michael's. It is theoretically possible that each store will get 50% of the crafts business in TC and both could end up closing. And then we are left with two ugly structures that really have gone "dark". This is business run amick and serves to useful purpose to the citizens of Michigan.

Subee
Tue, 01/29/2019 - 12:06pm

These cheap behemoths that litter our landscapes when they close should pay business taxes comparable to any other business. We only seem to get businesses looking for cheap labor; not the types that are here to grow (our subpar schools and roads keep them out). Traverse City allowed Hobby Lobby to build next door to a Michael's. It is theoretically possible that each store will get 50% of the crafts business in TC and both could end up closing. And then we are left with two ugly structures that really have gone "dark". This is business run amick and serves to useful purpose to the citizens of Michigan.

Matt
Wed, 01/30/2019 - 1:41pm

David, how do you explain Ct, IL, NY, CA, OR and VT just for starters. Outside of a few very wealthy metro areas, which skew their data, are all very poor states with super high taxes, poor schools, brutal costs of living and generally considered to have crappy business climates. Their few elite employers (Apple, Google, Facebook etc.) attract most of their employees from the entire world into their limited area, (and not so many home state natives). I think you read too much into relatively short time frames. MI's been a good bus. climate state for 8 years (After Granholm and SBT was repealed, not 25!) while you're ignoring very specific economic situations (Michigan's almost total generational dependence on auto Mfg and inevitable lingering effects in transitioning). Too much of chickens and egg situations, when agnosticism is warranted.

Tony Ettwein
Tue, 01/29/2019 - 10:44am

Costco did the same thing when they came to Kalamazoo. According to the Kalamazoo Gazette, they paid $17.5 million for their land and building. When Costco objected, the local assessor brought the value down to $8.6 million, and Costco wanted the assessed value dropped even further, to $4 million, which was "less than they paid for the dirt on which it was built." On the other hand, I know private homeowners who the City of Portage wants to tax for the value the city thinks the home is worth, even if they paid far less for it in real money. So those of us regular citizens are subsidizing the big box stores.

David Maturen
Tue, 01/29/2019 - 1:47pm

Very well researched article! The arguments against the “Dark Stores” bills ring hollow. It shows a fundamental lack of knowledge regarding long held and universally accepted professional valuation practices.
The fact of the matter is that basing an assessment only on “sales” as noted by the opponents is only one approach to valuation. As any professional appraiser knows, if the quality and quantity of comparable sales does not exist, then that approach is not used – no matter how hard one tries to make a round sale fit in a square hole. The other two approaches (cost and income capitalization) are legitimate and should be used and reconciled and a fatally flawed sales comparison approach (comparables must be truly comparable) disregarded.
The opponents of the current House and Senate bills (and my bills in the 98th and 99th legislature) still insist on using fatally flawed sales (as the Court of Appeals noted) with markedly inferior locations, functionally deficient buildings and worst of all deed restrictions that prohibit virtually all viable commercial activity for many times up to 25 years) to compare to brand new state of the art buildings in vastly superior locations with no deed restrictions on uses to set an assessment. This bogus theory not only hurts communities who rely on property tax revenues to supply needed public safety services (of which “big box” stores are high users) but also is grossly unfair to existing, local “mom and pop” stores who now are put at one more competitive disadvantage to the big box boys with their substantial (many times $100,000 per year) property tax savings.
After four years of getting stonewalled in the legislative process and after a very enlightened Court of Appeals ruling in Menard v Escanaba (and unanimous denial of leave to appeal by Menard by our Supreme Court), its up to the Michigan Tax Tribunal (MTT) to adopt sound, proven and professional appraisal practices in its decisions and for the legislature to give the MTT the guidelines it needs to make correct decisions for the citizens of the State of Michigan.
David Maturen is a former State Representative and Certified General Appraiser.

Cathy
Sun, 02/03/2019 - 9:27am

Maybe that’s where the big box stores need to start: with shuttered, closed buildings, Michigan has plenty. They should not be building new tornado prone buildings when we have plenty of other facilities available at negotiable prices.