‘Dark-Store’ Tax Challenges From Big-Box Stores Rise in Wisconsin

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna

Property tax appeals by big-box retailers like Target and Kohl’s featuring the “dark-store loophole” are ramping up across Wisconsin, a survey of municipal assessment officials revealed.

Dark-store property tax challenges in Wisconsin cities and villages jumped to 79 in 2017, from 63 in 2016, the Wisconsin Policy Forum and the League of Wisconsin Municipalities reported Aug. 28. The total for 2016 was slightly down from 66 dark-store tax challenges in 2015.

The data suggests retailers continue to embrace a commercial property valuation theory that asserts big-box retail stores should be assessed as if vacant, or dark, rather than as operating entities. The retailers argue that the high degree of customization to their facilities diminishes resale value. National retail chains including Lowe’s Cos. Inc., Home Depot Inc., Target Corp., Kohl’s Corp., Menards Inc., and Wal-Mart Stores Inc. have used the property valuation theory to generate substantial property tax reductions for their locations across Wisconsin.

The survey, however, pointed to a drop in property valuation challenges by retailers involved in long-term lease agreements under the Wisconsin Supreme Court’s 2008 precedent in Walgreen Co. v. City of Madison. The ruling held that tax assessments of certain retail stores must be based on fair-market rental rates rather than above-market rental contract values.

The survey showed 51 of these long-term lease challenges in 2016 but only 38 in 2017. The authors said the shift suggests “this type of challenge may be becoming less frequent.” Pharmacy chains including Walgreens, a subsidiary of Walgreens Boots Alliance Inc., have used such challenges in dozens of Wisconsin communities to cut their property tax liabilities.

Tax Fairness?

Curt Witynski, deputy executive director of the League of Wisconsin Municipalities, said the success of dark-store strategies has raised property tax obligations on homeowners and business owners, leading to concerns about tax fairness. With a growing number of communities affected by such challenges, Witynski said municipalities will demand a legislative solution.

“We remain very concerned about the tax shift from commercial to homeowners and small businesses,” Witynski told Bloomberg Tax. “We remain committed to closing the dark store and Walgreens loopholes next legislative session, which begins in January 2019.”

Legislation addressing these issues failed during the most recent legislative session.

Wisconsin S.B 292/A.B. 386, would have limited retailers’ ability to apply the dark-store theory by requiring adherence to generally accepted appraisal methods. A second bill, S.B. 291/A.B. 387, would have rolled back 2008 Walgreen ruling.

Municipalities are increasing pressure for a legislative solution. More than a dozen communities are holding advisory referendums in November to ask voters if the dark-store valuation method should be restricted.

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