Supreme Court Denies Rite Aid Appeal Over Property Valuation

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By Jennifer McLoughlin

Oct. 3 — The U.S. Supreme Court will let stand New York appellate decisions validating two property tax assessments against Rite Aid Corp. ( Rite Aid Corp. v. Huseby, U.S., No. 16-36, petition for certiorari denied 10/3/16 ).

In an Oct. 3 order, the high court denied the drugstore chain's petition for certiorari, which sought review of tax assessments from two New York towns, Irondequoit and Williamson. The dispute was over differences with property valuation of first-generation, build-to-suit retailer drugstores, with Rite Aid claiming equal protection violations under the U.S. Constitution (187 DTR K-2, 9/27/16).

According to Rite Aid's petition, the assessor's methodology for calculating tax on company properties was improperly based on each respective drugstore lease. Rite Aid said the state trial court agreed with it, and the New York Supreme Court later reversed in parallel decisions. The state's appeals court thereafter denied leave to appeal.

Practitioners told Bloomberg BNA that the case was the first to receive any New York appellate treatment regarding the presence of a drugstore submarket.

‘Gillette' Pushed Back

Meanwhile, the U.S. Supreme Court's Oct. 3 order didn't include Gillette Co. v. Cal. Franchise Tax Bd., which is the leading case over the Multistate Tax Compact. The certiorari petition seeks the high court's input on the nature of the compact—whether it's binding or advisory—and taxpayers' right to elect the compact's equally weighted, three-factor apportionment formula in lieu of a state-mandated apportionment method. The issue is pending in at least five other state courts, with petitions due to the nation's high court from the Minnesota and some of the Michigan decisions.

According to the Gillette docket, the case has been distributed for the Oct. 7 conference.

Assessing Lease Income

Rite Aid alleged that the New York Supreme Court, Appellate Division, Fourth Department required, for the first time in the case, property valuation according to build-to-suit financing leases only for net-lease drugstores, departing from a state rule mandating valuation of the fee simple interest.

“The rents were above market so the assessments were above market value,” according to the petition. “Consequently, the taxpayer paid more taxes than it would have, had the assessments been determined in a manner the same as other taxpayers; based on the market value of the real property alone.”

However, there was dispute over the legal basis for Rite Aid's position that the property valuations should disregard the lease.

“Our view is New York state, at least, is clearly not a fee simple absolute state,” Thomas A. Fink, partner with Davidson Fink and counsel for Irondequoit, told Bloomberg BNA Oct. 3, noting that drugstore companies are arguing nationally that a lease shouldn't be considered in valuing property.

“That concept is nowhere in any statute or legal concept that our courts have ever adopted,” he added, discussing New York law. “So, we always utilize as a first best evidence of income leases that are on property.”

Raising Issues Beyond Record

In Rite Aid's reply brief, it refuted allegations that it waived the federal constitutional claim by failing to present equal protection or due process issues in prior proceedings.

However, Fink said, “it was never brought up in either the trial court or the appellate court, or their application to get to the Court of Appeals.”

Defining Sub-Market

Patrick L. Seely Jr., partner with E. Stewart Jones Hacker Murphy LLP and counsel for Williamson, told Bloomberg BNA Oct. 3 that the case was the first in which New York appellate courts evaluated the presence of a drugstore submarket.

“It was pretty well established at the trial court that all of these national chain drugstores acquire their properties the same way,” he said, adding that “these are sophisticated, regular participants in the marketplace. And that was enough for the court to look at and say, you know what, there's enough of this activity that it's a submarket, and we should be looking in that submarket for those transactions.”

Seely noted that the predicate issue was finding comparable property.

“Whether that’s a property that is leased, that you’re going to then adjust to generate a value on the income approach, or it’s a property that is sold, that you’re going to compare and adjust for differences to adjust the sale price, you still are trying to find comparable properties,” he said, “What are good comparable properties for the subject? And in this case here, it was our position that you should be looking at other drugstores.”

Both Seely and Fink described several features of such drugstores—including placement on traffic corners, with multiple street access; considerable parking space; and drive-through windows—designed to facilitate business and increase store traffic.

However, Seely noted that Rite Aid was relying in part upon properties in strip shopping centers. And some stores were subject to covenants restricting future use or lease by other drugstore competitors, so that their current use was not as a drugstore.

‘Gillette' On Hold

In bumping the Gillette petition to the Oct. 7 conference, the Supreme Court won't distribute a decision until next week, at the earliest.

Court watchers haven't been optimistic about Gillette's prospects of an audience before the high court, in part because courts in several states have trended against taxpayers (187 DTR K-2, 9/27/16).

During a Sept. 29 webinar hosted by Deloitte Tax LLP, Senior Manager Tom Cornett noted there may be issues of state sovereignty that weigh against certiorari.

Counsel for Rite Aid was not immediately available for comment.

To contact the reporter on this story: Jennifer McLoughlin in Washington at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Text of the Supreme Court's denial is at

Rite Aid's petition for certiorari is at

Rite Aid's reply brief is at

Irondequoit's brief is at

Williamson's brief is at

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