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Dark store fight moves to Legislature

ESCANABA — The fight over what constitutes fair commercial property taxation has made its way into the state legislature with bills in both chambers seeking to close the so-called “dark store” loophole.

Proponents of the dark store theory of property appraisal argue store buildings should be appraised at the value the building would have if it were vacant. They claim any other method of appraisal unfairly taxes companies for their business dealings rather than the actual value of their property.

However, municipalities and other public entities that directly benefit from property tax revenue see it differently, pointing to the practice of adding deed restrictions to store properties that prevent the properties from being used in certain ways. Retail stores may prevent other retail stores from entering their former locations after a sale — a move that limits competition but also makes buildings harder to sell.

“There are examples of Walmarts that have put on deed restrictions on sales that make it so (the property) can only be a charter school or a go-kart track, and as it turns out, that is not the highest and best use of that particular building and location right off the highway, and therefore the value of that building and property is substantially lower than it should be,” said Republican State Representative Beau LaFave, who proposed a bill in the House to tackle the issue.

According to LaFave, many big box stores not only put deed restrictions to their own properties, but will use the property values of other vacant, deed-restricted properties as part of a market analysis to claim their taxable value should be significantly lower than it was originally assessed.

“Comparing that to an open business — even just a business that was just opened and built six months to a year ago — is unfair, because you’re comparing an apple to some other gross or undesirable fruit,” he said.

Escanaba has been the epicenter of the dark store debate since 2014, when the local Menards used the dark store theory to win a Michigan Tax Tribunal appeal that significantly reduced its property value. The decision lowered tax revenues for public entities including the city, local schools, and Bay College; forced these public entities to issue tax refunds to the retailer; and prompted other businesses to appeal their own property values.

The battle between the city and Menards is ongoing, but has already reached the state supreme court. In October of 2017 the high court refused to hear an appeal from Menards, which was requesting the justices reverse a Michigan Court of Appeals ruling that favored the city earlier that year.

A quarter-million dollars has already been spent by the city on past court battles with Menards, and the city is actively collecting money from other entities to continue the fight at a Tax Tribunal Hearing scheduled for May of this year.

LaFave’s bill, and a substantively similar bill proposed by Senator Ed McBroom in the Michigan Senate, aim to both address the dark store theory and give tools to businesses and municipalities to fight appraisals they feel were done unfairly.

The House bill dictates the tax tribunal must reconcile the method of valuation used by the assessor who initially assessed the property as well as capitalization of income (a commonly used appraisal formula that figures in income from a property), cost less depreciation, and comparable sales. Comparable sales that are subject to deed restrictions may not be usable if those deed restrictions cause a substantial drop in value from the “highest and best use,” the use that would provide the highest value for the property.

Because the tribunal must use the three methods of appraisal, LaFave noted anyone seeking an appeal of a tribunal decision would be able to look back on how the decision was made when making their argument for a change.

“I’m much less concerned with the actual answer that the tax tribunal assigns, as much as I’m interested in how they reach that determination. I want them to show their work,” he said.

So far, the Dickinson County Board is the only governmental entity to support the bill with a resolution, but LaFave is optimistic that other communities — including Escanaba — will support the measure.

The bill also has support from across the aisle. Co-sponsoring the bill with LaFave is Democratic Representative Julie Brixie of Meridian Township.

“We’re going to work together and make sure when this bill hits Gov. Whitmer’s desk that both of us are happy with it,” said LaFave.

However, not everyone supports the proposed legislation. At a recent stakeholder meeting, representatives from the Michigan Chamber of Commerce and the Michigan Retailers Association spoke out against the bills.

“They have members that they work for, but I’m on the side on this one that we’ve got to make sure that our local governments have an ability to fund themselves, to pay for vital services, and that small businesses get the same tax breaks — or don’t get negatively impacted because their big box store counterparts have lawyers that they can sue a city into oblivion to get their tax bills lowered when small mom and pop shops can’t,” said LaFave.

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