'Dark store' cases could cost millions in taxes

HOWARD - An aggressive move by some major retail chains is putting homeowners in parts of Brown County and a number of other areas of Wisconsin at risk of a property tax jump in the coming years.

The action by retailers like Menards, Target, Lowe's and Walgreens has cost taxpayers millions of dollars in Michigan and Indiana. Oshkosh had to refund more than $300,000 in taxes and fees. Howard, the Howard-Suamico School District and the county could wind up owing thousands to Menards.

It works like this: Retailers challenge their property assessments, citing similar — but vacant, or "dark" — stores, claiming their buildings are worth millions of dollars less than they've been assessed for by local governments, which typically set values based on both the building and its use.

In many cases, they've won so decisively that a Bloomberg headline said stores have "weaponized" the approach.

When retailers win, the other taxpayers lose. Municipalities have two choices: Cut services — sometimes dramatically — or make the rest of the community pay more in taxes. About 70 percent of municipal tax collections comes from homes. Smaller communities are hit particularly hard due to their smaller tax bases.

"What happens if the assessments of large format retailers get chopped in half?," asked Howard Village Administrator Paul Evert. "All the other taxpayers pick up the slack."

How much slack? Howard has assessed the Menards and its 18.7-acre site at 2300 Woodman Drive at $12.45 million. Eau Claire-based Menard Inc. acknowledges it spent $10.6 million to buy the land and build the store, but claims in legal papers that the site is worth only $5.8 million.

In papers filed in November, the retailer demands that Howard provide a refund, with interest, and pay its legal fees. "The 2016 assessment of the property was excessive," wrote Christopher Strohbehn, a Milwaukee attorney. "The tax imposed on the property was excessive."

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The challenge is one of more than a dozen the company has filed in Wisconsin in the past year.

The company listed several stores as comparable to its Howard facility, including a Cub Foods in Green Bay, a Sears in Sheboygan and a former Home Depot in Beaver Dam. The three have something in common. None has operated as a store for years.

With Menards paying $209,000 in taxes this year,  the communities that tax it would have to refund about $111,000 if the store wins the case.

'A real problem'

Communities including Ashwaubenon and Howard and the League of Wisconsin Municipalities are asking the state to step in, said Patrick Moynihan Jr., the Ashwaubenon village clerk who also represents the village on the county board. A committee of county lawmakers earlier this month recommended adding their voices to that crowd, saying the state needs to adopt legislation that blocks businesses from using unused buildings to reduce taxes on working stores.

"This is causing real impacts," said Howard Supervisor Richard Schadewald. "And the only remedy we have to help local taxpayers is with the state legislature. This is a real problem."

How real? Menards' annual tax payment of Howard-Suamico School district taxes would fall from roughly $103,000 to about $48,000. For 2016, the district would have to refund the difference. In future years, the district would face a difficult choice: increase taxes next year to make up the difference, or cut its budget by a corresponding amount.

"That would be a rather large refund," said Matt Spets, the district's assistant superintendent for business services. "You're talking about one less teacher."

A reduction in the store's assessment would also mean more than $50,000 in lost revenue for others that tax the store: Brown County, the village of Howard, Northeast Wisconsin Technical College and the state of Wisconsin.

Municipalities also fear that successful challenges will prompt other businesses to take similar steps.

"If one type of business or one type of property gets more favorable treatment, then everybody is going to be looking at that," Oshkosh City Attorney Lynn Lorenson said. "They'll say, 'If Walgreens had success, maybe we can use a similar argument.'"

Retailers' side

Retail chains see the issue differently. They insist it's unfair for communities to assess based on what's inside their stories, rather than valuing only the bricks and mortar.

Additionally, modern retail store designs are fairly unique, making it sometimes difficult for a company to sell a store it no longer wants or needs. Potential resale value, of course, plays a role in how a property can be assessed. Or, like a former Walmart near Milwaukee, stores have deed restrictions that prevent them from being operated by other retailers.

The attorneys listed in Menards' Howard case didn't respond to requests for comment last week. But in a January interview with the Journal Sentinel, one made his position clear: The value of the store is its property, not what's inside the building.

Minnesota attorney Robert A. Hill's website calls his firm "relentless advocates for property taxpayers." He said municipalities “just want to pretend that what’s black is white, and that real estate somehow should not be the only thing that gets assessed."

Municipal officials, though, says that approach defies logic.

"A brand-new Walmart is worth the same as a boarded-up Kmart?" said Deena Bosworth, director of governmental affairs for the Michigan Association of Counties. "I don't think so."

'Devastating effect'

In Michigan and Indiana, where dark-store lawsuits were an issue before they took hold in Wisconsin, impacts are being felt.

Michigan's local governments have issued more than $100 million in tax refunds since 2010, experts say. Indiana's spent an estimated $120 million. In 2015, Indiana attempted to resolve dark-store cases by establishing new assessment standards for big-box stores, but repealed them in 2016, apparently amid concerns about constitutional issues.

Before dark-store challenges became common, the average Michigan 'big box' store was assessed at $55 per foot, said Jack Van Coevering, an attorney who was chief judge of the Michigan Tax Tribunal but now represents municipalities in dark-store cases. Now, assessments of Menards and Target are less than half that.

“There’s wave after wave after wave,” he said. “Whether we’ve reached the end of the storm, I don’t know.”

An Escanaba-area library cut hours because its host community had to cut its budget. When an Upper Peninsula Lowe's brought a dark-store case last year, about 130 people protested outside the business. Northern Michigan University produced a 25-minute documentary video, "Boxed In," on dark-store impacts.

"This has a devastating effect," the Michigan Municipal League says. "Municipalities don’t just lose future revenue, but have to pay back the retailers for 'over-taxing' them in prior years."

Communities also incur costs to fight the challenges. A Port Huron Menards sought a $2 million cut to its 2014 and 2015 assessments. A court reduced the store's valuation by $300,000.

The case cost the city more than $33,000 in legal expenses — more than it receives in taxes from the store.

dschneid@greenbaypressgazette.com and follow him on Twitter @PGDougSchneider. USA TODAY NETWORK-Wisconsin reporters Rick Romell and Nate Beck contributed to this story.

De Pere suit

Big-box retailers aren't just suing because of assessments on their stores.

ShopKo Stores Operating Co. LLC has filed legal papers saying the city of De Pere over-assessed its west side distribution center by more than $9 million. The retailer seeks an assessment reduction from $20.1 million to $10.9 million on its facility at 1717 Lawrence Drive, plus a refund of taxes it says it overpaid, and legal costs.

Shopko is represented by Christopher Strohbehn of Milwaukee, who also represents Menards in it's assessment lawsuit involving its Howard retail store. De Pere is represented by a Madison firm.

Other battlegrounds

Brown County isn't the only place where some major retailers are seeking significant reductions in their assessments. Highlights:

►Alabama: Lowe's, a $59 billion business, has filed lawsuits seeking assessment reductions on 27 stores. Officials said a loss could cost the state $1.5 million annually.

►Fond du Lac: Menards argues that the value of its store is no more than $5.2 million; the city's assessment is $9.2 million. A similar lawsuit from Target says Fond du Lac should reduce its taxes by a third.

►New York: The city of Auburn agreed this month to settle a dispute by reducing the assessment of a Walmart by about $1 million, which will give the store a tax refund of about $11,000.

►Racine: Target has filed multiple challenges to its assessment. It cites a vacant Kmart and a former Home Depot as comparable properties.

►San Antonio, Texas: Lowe's sued Bexar County, claiming its 11 area stores were worth the same as empty buildings — about $30 per square foot, rather than the $80 to $85 per square foot at which they were assessed. A court recently ruled against the retailer.

SOURCES: USA TODAY NETWORK-Wisconsin, al.com, The Journal Times, San Antonio Express-News, Auburn Citizen.