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Michigan lawmaker's bill aims to end big-box property tax reductions

The Michigan Senate next week is expected to consider a bill to close an alleged "tax loophole" for big-box retailers. 

The legislation by Rep. David Maturen (R-Vicksburg) comes at a time when big-box retailers in several states are pressing property tax assessors to slash their tax bills in what critics call “the dark store strategy” – a reference to establishing the market value of an operating big-box store based on the value of a similarly sized vacant, or “dark” store.

In Texas, the Bexar County Appraisal District reports that a nonbinding arbitration hearing involving several Lowe’s stores will take place in mid-October. The hearing grew out of a lawsuit brought by Lowe’s assertions that its stores there have been over-assessed for years.

Maturen told AMI Newswire that he is working to schedule a hearing with the Senate Finance Committee for a bill that earlier this year passed the House of Representatives by a vote of 97-11. Maturen’s House Bill 5578 would base big-box property tax valuations on their “highest and best use” in the overall marketplace, he said.

“All I’m after is a professional approach to the assessment appeal process,” said Maturen, who has decades of experience as a licensed real estate appraiser.

The Michigan Tax Tribunal over the past six to eight years has embraced the "dark store" theory and sided with large big-box retailers in their efforts to substantially reduce their property tax burdens, he said.

Both the Michigan Chamber of Commerce and the Michigan Retailers Association have opposed Maturen’s bill, arguing that local government agencies have been vilifying some of the state’s largest employers, whose stores have been over-assessed in the past. The retailers have a right to fair and impartial appeals, the business groups said.

In an opinion piece published last week, the senior director of tax and regulatory reform at the Michigan chamber, Tricia Kinley, said the legislation would tie the hands of the state’s tax tribunal and require that it ignore established accounting principles. The use of “dark” properties for comparisons is not a loophole but an established practice used by appraisers, Kinley said.

In addition, she criticized the idea that assessments should look at the profitability of the retailer in examining the value of big-box stores. Michigan already deals with that issue through the state’s income tax, Kinley said.

For supporters of the “dark store" theory, at the heart of the matter is the concept that big-box stores are built to suit the unique operation of a specific retailer and have very limited value when sold or leased. Thus, their market value may be significantly less than the cost of materials used to build the structure, according to the retailers’ supporters.

“The legislation includes so many restrictions against the use of ‘comparable sales’ in determining a property’s value that it strongly favors use of the ‘replacement cost’ valuation method,” the Michigan Retailers Association said in a blog post. “Replacement value can greatly overstate what a buyer would pay for a property.”

The association also said that Maturen’s legislation creates separate appeals processes for different classes of taxpayers. This violates a clause in the Michigan constitution that mandates the assessment of all properties using the same methods, the association said.

“HB 5578 is a backhanded attempt to discourage taxpayers from appealing their property assessments and would change the tax tribunal appeals process, making it more difficult and costly to file a property tax appeal,” the association said.

Maturen, however, sees the bill as providing standard, professional guidance to the tribunal, focusing on traditional methods of property valuation that involve comparable sales, cost of construction minus depreciation and the income a property produces.

The idea that you can only look at buildings as empty shells rather than consider their business value is lunacy, the lawmaker said. He offered the example of apartment buildings, saying that an assessor would not compare the value of a building full of tenants to one that is vacant and not in operation.

“This special carve-out that only these big-box retailers got was not something we wanted to have in our property taxes,” Maturen said.

He also sees the tide beginning to turn against the "dark store" theory in Michigan. In May, the Michigan Court of Appeals ruled against the tax tribunal’s valuation methods in the case of Menard Inc. v. City of Escanaba and told the tribunal to follow principles that mirror Maturen’s legislation, he said.

Opponents of the "dark store" theory say that lowering the property tax bill paid by big-box retailers serves to shift the tax burden in parts of Michigan from wealthy national chains to small businesses and homeowners. And they say such retail properties in other states are assessed at two, three or four times what they’re valued at in Michigan.

The issue has caused the formation of similar battle lines in states such as Wisconsin and Indiana.

Deputy Chief Appraiser Mary Kieke of the Bexar County Appraisal District said the system in Texas makes it easy for retailers to appeal tax assessments. Currently, Lowe’s is challenging its stores’ assessments for 2014 through 2016, Kieke said.

“This is a more aggressive attempt to lower values than has been tried in the past,” she told AMI.

The county valued Lowe’s properties at about $81 per square foot this year, and the retailer contends some building should be appraised at $34 per square foot, Kieke said. The effort could lead other properties, such as drug stores and apartment complexes, to also seek reductions in their property tax assessments, putting the local tax base in a “downward spiral,” she said.