Beware of “Dark Store” Tax Assessments

Big box retailers are increasingly using the “dark store” tax strategy under which they want to pay property tax for one thriving location based on comparables that are no longer operating. The lower valuation is costing governments millions of dollars, as one county in Kansas found out after a state review board said it overvalued Walmart’s stores by $60 million.

The justification put forth by retailers is that property tax is tied to the building, not its operation, so the closed stores should pull down the tax rates of the open store. The idea started getting traction about five years ago in some states where laws offer fertile ground for the Dark Store Theory to grow and allow damaging legal precedent to be set.

Stores close and stay vacant for a number of reasons. The retailers may move to a better location or want to expand services. If the original store has deed restrictions it becomes harder to sell; also, keeping the unused real estate crowds out competitors.

Some jurisdictions have been able to defend their assessments of industrial and commercial properties by saying that a property developed for a special purpose must have that special purpose considered as the highest and best use, along with the present use of the unique property. Florida and Ohio offer examples where updated laws allow the governments to successfully defend their tax assessments of industrial and commercial properties, and maintain the expected level of revenue.

However, there have been cases where governments have failed because of unfavorable language in their statues or local ordinances. In addition to Kansas, governments in Michigan, Ohio, and Indiana have all lost “dark store” court cases.

For the jurisdictions, it’s not enough to rely on traditional appraised values because there is so much uncertainty around the issue. One court in Ohio, for example, considered appeals of two separate cases within a month of each other that resulted in different rulings.

Are you prepared? For a conversation about your ordinance and how well you think it will defend against the “dark store theory,” please email jonathan.gerth@avenuinsights.com.