A photo-illustration of several big-box retail stores.
Dark stores rising: As big-box retailers shutter, many companies have found a way to turn vacant properties into lower taxes on open stores nearby. Madison McVeigh/CityLab

Big-box retailers nationwide are slashing their property taxes through a legal loophole known as "dark store theory." For the towns that rely on that revenue, this could be a disaster.

WEST BEND, WI—Kraig Sadownikow doesn’t look like an anti-corporate crusader. The mayor of West Bend, Wisconsin, stickers his pickup with a “Don’t Tread on Me” snake on the back window, a GOP elephant on the hitch, and the stars-and-stripes logo of his construction company across the bumper.

His fiscal conservatism is equally well billboarded: In the two hours we spent at City Hall and cruising West Bend in his plush truck, Sadownikow twice mentioned the 6 percent he has shaved off the Wisconsin city’s operating budget since becoming mayor in 2011, and stressed its efforts to bring more business to town.

So you might be surprised to learn that Sadownikow (he instructed me to pronounce his name like sat-on-a-cow) is personally boycotting two of the biggest big-box retailers in his town, Walmart and Menards, the Midwestern home improvement chain. He’s avoiding shopping at these companies’ stores until they cease what he sees as a flagrant exploitation of West Bend’s property tax system: repeat tax appeals that, added up, could undermine the town’s hard-won fiscal health.

Sadownikow is one of many unlikely combatants who have lined up against “dark store theory.” That’s the ominous-sounding term that administrators have given to a head-spinning legal argument taking cities across the U.S. by storm. Big-box retailers such as Walmart, Target, Meijer, Menards, and others are trimming their expenses in a forum where few residents are looking: the property tax assessment process. With one property tax appeal after another, they are compelling small-town assessors and high-court judges to accept the novel argument that their bustling big boxes should be valued like vacant “dark” stores—i.e., the near-worthless properties now peppering America’s shopping plazas.

To hear it from opponents, this emerging legal phenomenon essentially weaponizes an already grim retail landscape. But it’s not always clear who’s right and wrong—dark store theory is a battlefield muddied in the cryptic laws and upside-down logic of commercial property valuation. The potential slam to vulnerable tax bases is tangible, however. If the stores prevail in West Bend, for example, it would reduce property values by millions of dollars, force the city to refund hundreds of thousands of dollars in back taxes, and set back payments on the public infrastructure that the town built to lure these retailers in the first place. That could result in higher taxes for residents, fewer police officers, firefighters, and teachers, and potentially, a mess of public debt.

“They are holding the communities for ransom,” said Shannon Krause, the assessor in Wauwatosa, Wisconsin, where Lowe’s, Nordstrom, Best Buy, Meijer, and others have also appealed their valuations, year after year after year. “It’s a bleeding out.”

Wauwatosa and West Bend are two of the countless communities around the U.S. confronted with dark store appeals that cities worry could be ruinous. A survey conducted by CityLab of the International Association of Assessing Officers, a society for property valuation and tax policy professionals, found that these types of appeals have been filed in at least 21 U.S. states over the past 10 years. The appeals likely number in the thousands, based on CityLab’s review of legal databases and dozens of interviews with property tax experts.

This map gives a sense of where cities and counties are facing this novel type of tax appeal, and where state legislatures and supreme courts have considered it. (Data: September 2018 IAAO member survey conducted by CityLab, legal records searches on Westlaw and Justia, interviews with tax assessors, lawyers, and municipal finance experts. Map: Madison McVeigh/CityLab)

In Wisconsin, at least 230 cases have been filed across 34 counties since 2015, many of them repeat appeals for the same properties, by the top three attorneys representing retailers. In Michigan, more than $75 million in tax value was lost from the rolls from related appeals between 2013 and 2015. In Indiana, an estimated $3.5 billion in property value is on the line. Texas stands to lose $2.6 billion per year if successful appeals become widespread, according to the Republican state comptroller Glenn Hegar. “No one likes paying taxes, including me,” Hegar wrote in the Austin American-Statesman in 2017. “But I have a significant problem when large corporations and their lobbyists try to manipulate the tax system to lower their property taxes … Dark store theory is corporate welfare of a particularly ugly kind.”

Born of the post-recession retail apocalypse and spread by a cottage industry of “no-win, no-fee” tax consultants, dark store theory could foreshadow an even larger threat to local finances—a weakening of the basic social contract underpinning the property-tax apparatus that keeps cities and towns afloat. And here’s the rub: The ruthless logic helping these brick-and-mortar giants dodge their taxes might make a lot of sense.

***

Jason Williams, the assessor for the city of West Allis, Wisconsin, pressed flat a stack of PowerPoint print-outs against the trunk of his black Impala. We were standing in the giant moat of parking surrounding a Walmart Supercenter in the neighboring community of Greenfield. It stands next to a smaller big-box store, now subdivided into a non-denominational church and a thrift shop. This second property used to be the Walmart in town, before it became one of many empty shells the discount giant has sloughed off in the past decade as it has upgraded to its preferred, more gigantic model.

Williams chose this spot because this reptilian skin-shedding of big-box chain retailers helps frame dark store theory. It’s about the second lives of these oversize retail spaces, and about how much their outer casings are worth—when they’re vacant, and when they’re occupied. In other words, it’s about what counts as market value.

In the biting Wisconsin wind, Williams showed me a photo of the Sam’s Club in West Allis that he battled last year, and which he is now fighting again. (He didn’t want to visit this store in person with me because of the legal dispute.) As of 2017, the city had valued that store at $11 million, a number based on what the property had cost the owner to buy back in 2001, plus the added value of renovations over the years, adjusted at the going rate of depreciation. These are the methods he uses for every type of property, Williams told me, following those rules in his handbooks. “I’m not saying my numbers are necessarily the best ones out there,” Williams told me. “But they’re what I get when I run the math.”

But a tax agent from Chicago filed an appeal on behalf of Sam’s Club, arguing that the store was worth just $7.2 million, based on the low sales costs of a handful of second-generation big box locations scattered around the state. The comparables that the agent provided included three former locations of the now-defunct electronics retailer American TV, an old Lowe’s, a former Target, and a former Walmart (actually, the same property in Greenfield Williams and I were standing in front of now). All of them sold for between $2 million and $4.5 million between 2012 and 2014: much lower sales prices than what their original owners had purchased them for years before. Some had second-generation occupants; some were bank-owned.

Jason WIlliams makes the case against dark store theory outside a church that moved into Greenfield, Wisconsin’s old Walmart. Beside it stands a new, much larger Walmart. (Laura Bliss/CityLab)

Big-box defenders argue that the “sales approach” (what someone recently paid for a similar property) is the best way to determine a building’s value. And in many states, including Wisconsin, sales are supposed to be the first variable in the valuation equation, whenever possible. Therefore, retailers’ lawyers say, a Sam’s Club valued at $11 million is overvalued, because its neighbors are selling for a third of that amount. In a real estate market that’s oversaturated with retail closures, bankruptcies, and vacancies galore, they insist, no one wants a big box store anymore. If you just look at the sales prices, they are often not wrong.

But assessors say that this misses what gives a functional property its value. Location is everything in real estate—there may be a good reasons why some of those stores went dark. Besides, the market for big boxes is too small to rely solely on sales; construction costs and property incomes also have to be taken into account. And many of these vacant and depreciated properties would need major repairs to achieve a state of “highest and best use,” which would be a more appropriate comparison for an open and fully updated store.

Besides, there’s something plainly illogical about the argument. “Do you want me to value your house as if it’s closed and boarded up?” said Krause.

So, case closed? Not quite. The vast majority of dark store appeals brought by big boxes—many of which ask for write-downs of 50 percent—are being settled for a lower valuation, probably in the ballpark of 85 percent, Thomas Hamilton, a professor of real estate at Roosevelt University, told me. Many assessors strive to be conservative in their estimates, so they usually try to find a happy medium when taxpayers protest. Plus, it’s costly to litigate.

Yet dark store theory appeals have been incessant, and small towns feel outgunned. Retailers come back, year after year, insisting on paying less, even after they’ve been granted reductions. For them, every demand brings the opportunity for a lower valuation, and there’s no real financial downside, with outside tax lawyers working for contingency fees. “They’re forcing the hands of municipalities to go to court, and then they keep bargaining it down,” said Krause, the assessor in Wauwatosa. Repeat appeals from Lowe’s, Best Buy, Meijer, and others dating back to 2013 have cost her city $2.4 million in legal fees.

Sources: Wisconsin Policy Forum, Wisconsin Circuit Court Access, Wisconsin League of Municipalities.

Fighting dark store appeals is costly, but so is acquiescence. If six properties under dispute in Wauwatosa won their appeals, local government (including the city, school district, county, and sewage district) would owe them $22.5 million in tax refunds, according to the city’s data. If West Bend reduced its assessments for Walmart and Menards by 50 percent, as both stores have basically asked, it would cost the city about $220,000 per year in lost revenue, or about 1 percent of its annual operating budget. It would also have to refund the stores $540,000 for all the years of assessments that the stores are disputing. (The city has already lost thousands from a Shopko it settled with; the local school district also had to refund $60,000 over related cases.)

The tax-base pinch might not be so painful if just a few cases are successful. The fear is that victories could set a precedent, and that the argument spreads to industrial properties and other types of commerce. In Wisconsin, because there’s a property tax levy cap, assessors told me that existing homeowners, renters, and small businesses would eventually have to pay more in order to recoup the predicted losses from widespread big-box appeals.

Wauwatosa might have more dark store theory litigation in action than any town in America. According to the city, these six properties are all fighting for substantial property tax reductions, in many cases greater than 50 percent. Note that Mayfair Mall’s argument centers on the value of its lease—a different but related issue. (Data: City of Wauwatosa. Note that assessed values for 2018 are the city’s estimates based on the 2017 tax rate. Map: David Montgomery/CityLab)

What if every national chain store around successfully slashed their obligations using dark store theory and similar arguments? According to an analysis by the Wisconsin League of Municipalities, the average homeowner across seven cities could wind up paying an extra $385 per year in property taxes.

Or they’d have to cut services, which has already happened in small towns across Michigan. In Sault Ste. Marie on the Upper Peninsula, a battle with Walmart forced the city to make pension cuts. In the city of Escanaba, an ongoing battle with a Menards has led to reduced library hours. (Walmart, Menards, Target, Home Depot, and Meijer, did not return CityLab’s requests for comment. Lowe’s referred me to the Retail Industry Leader’s Association, which hasn’t responded; we’ll update this story if it does.)

It might seem absurd that a corporation can insist that a bustling big box is worth little more than a worn-out husk many miles away. Yet this theory is winning over courts. Though most appeals are settled informally by assessors, a small and growing portion are getting kicked up to local tax boards, circuit courts, and in a few states, state supreme courts. In about half of these cases, justices are siding with big box proponents. Dark store theory has “largely withstood judicial scrutiny, leading to hundreds of store devaluations and to hundreds of millions of dollars in estimated lost tax revenue to local governments,” according to a January 2018 report by S&P Global Ratings, which warned investors of the risk the issue poses to municipal budgets.

There’s a good reason why dark store theory emerged in the wake of the Great Recession, as empty “ghost boxes” pockmarked the suburbs and exurbs of the upper Midwest. After the economic shock of 2008, consumer spending tanked, sending business on Main Streets and shopping plazas alike into the red. Today, combined with the rise of Amazon and web-based shopping, once-mighty retail giants keep tumbling. In October, 125-year-old Sears filed for bankruptcy, with plans to close 46 stores by Christmas; Toys ‘R’ Us shuttered more than 700 locations around the country earlier this year. According to Bloomberg, from the beginning of 2018 through April, U.S. store closures had hit 77 million square feet.

The Detroit-based tax attorney Michael Shapiro has been credited with pioneering the technique of using “dark stores” as sales comparisons. In 2010, Shapiro helped lower the valuation of a Michigan Target by about half using dark store theory (the term itself was later coined by assessors). Since then, he’s fought dozens of such cases on behalf of retailers; in 2015, he told the Detroit Free Press he estimated that more than 90 percent of big-box stores around the state had been revalued in this manner.

Robert Hill, a Minnesota-based tax attorney, and his Madison-based counsel seem to have filed the bulk of appeals and lawsuits around Wisconsin. His argument’s strength seems to be its simplicity: “Who needs these things?” Hill told a local newspaper last year. “These things are so darn big.”

In other words, the United States is fatally oversupplied with big boxes. And that has made all of them—alive or dead, occupied or not—worth a lot less than you’d think.

Working mostly on contingency fees, Hill flies around the country to fight for Walmart, Menards, and others. When I reached him by phone, he was in Colorado, surveying a Walmart with a colleague. “The trend-line for these buildings is that they’re too big, and they sell for warehouse prices,” he told me. “It’s not great construction. The ceilings are too high. Where are the dock doors? If you want to put product in a warehouse, these are going to be the last places you want to buy.”

Why would one of these retail behemoths be worth any more or less than an identical one a few exits away, just because it was currently open and the other wasn’t? “I don’t know if these assessors give a rat’s patootie about functional obsolescence,” Hill said.

Hill made no bones about the fact that these companies are looking to trim costs where they can, as they are entitled to do. What matters here is ultimately fair taxation, he insisted. “How many taxpayers do you know that would be willing to pay based on an assessment that’s five times more than they’re able to sell their properties for?” he said.

In Hill’s formulation, corporations need to defend themselves from being “discriminated against” by assessors who intentionally overtax successful businesses. That is why he works on such a wide scale. “We eat what we kill,” he said. “We kill only because they need to be killed.”

Kraig Sadownikow, mayor of West Bend, Wisconsin, is a bumper-sticker conservative and an opponent of dark store theory. (Laura Bliss/CityLab)

It’s not hard to see how an aggressive defense like his could come across more forcefully in a courtroom than the jargon-heavy, procedural talk of a municipal bureaucrat. The practices cities and counties use to assess properties may be standardized in professional handbooks, but they are by no means black-and-white—not like the stark portraits of taxpayer injustice that Hill painted. Property assessment is complicated, and not all practitioners explain their methods clearly.

What’s more, when I asked city officials to explain the precise legal flaw with dark store theory, many appealed to plain common sense. “They’re literally using closed, boarded-up stores as comparables for a recently renovated, vibrant property,” Sadownikow said.

As crazy as that sounds, Hill has been able to counter that point quite effectively, and in legal terms. Similarly, local leaders have tended to focus on the injustice of these shrewd lawyers preying on small towns to plump up corporate bottom lines. The David-and-Goliath optics aren’t flattering, but that’s not Walmart’s problem. For better or worse, every U.S. taxpayer has the right to attempt to haggle down their property taxes. And some of the biggest retailers in the country have a powerful new tool at their disposal.

***

When you zoom out from these byzantine quarrels, the woes of the taxman look even grimmer. Property assessments are but a small and emerging frontier for creative tax workarounds among large U.S. corporations. Thanks to offshore tax havens and other breaks and loopholes, many names in the Dow 30 have for years enjoyed a shrinking tax burden as a share of their profits. A 2013 Washington Post analysis found that the share of income Walmart paid in taxes dropped by 24.3 percentage points between 1971 and 2012. Home Depot’s fell by 12.5 points between 1971 and 2012. Today, President Trump’s $1.5 trillion tax code overhaul has boosted GDP and economic growth, at least temporarily. But one year in, corporate tax revenues have also dropped by one-third. And the new cap on state and local tax deductions threatens to further pressure city and school budgets.

Historically speaking, brick-and-mortar retailers haven’t had as much luck in lobbying for federal tax breaks compared to peers in tech and manufacturing, such as Amazon, Facebook, and Boeing. But at the state and local level, they’ve scored generous incentives. Hungry for development, many communities go to great lengths to lure mega-retailers in with public subsidies and tax benefits. For example, West Bend spent nearly $16 million to build infrastructure on once-vacant farmland solely to attract Menards and Walmart, Sadownikow told me, with the plan to finance that with the future growth in property taxes. Now, if the stores successfully slash their payments, the city would be forced to drag out its timeline for paying off that investment. This also raises the specter of debt.

It’s like a betrayal, Krause told me. “They come in promising jobs and to add to the tax base—more development, more tourism, more people coming in,” she said. “Now look at what they’re doing.”

Sources: Michigan Association of Counties, CityLab IAOO survey, Austin American-Statesman, Association of Indiana Counties property tax analysis, provided to CityLab.

In so many ways, it seems the tax code no longer fits the players, and that may include property assessment. And dark store theory may be bigger than big boxes: As challenges spread geographically, city administrators fear the tactic will catch on among other property classes, with fast food outlets, banks, grocery stores, and office buildings deploying similar arguments in an effort to slash their tax obligations. Indeed, legal records show that this is happening: Two Hy-Vee supermarkets in Iowa have asked for write-downs using vacant properties. A Steak ‘n Shake in Warren County, Ohio, has made a similar argument about the value of its lease.

What if no one can agree about what any type of property is worth? That way lies serious fiscal havoc. For local government to successfully operate police departments, school districts, and other public services, “the tax depends on an agreement about what the basis for market value is,” said Joan Youngman, a senior fellow and chair of the Department of Valuation and Taxation at the Lincoln Institute of Land Policy, told me. “A new theory has come along that challenges the usual practice, and it needs to be answered.”

The law will have to settle the matter, but it’s not clear when that day is coming. For the last two years, Wisconsin mayors and assessors have been testifying before Madison lawmakers with charts, graphs, and reams of spreadsheets that spell out how costly this battle could get. Last year, 19 of the state’s 33 senators (10 Democrats and nine Republicans) signed onto a bill crafted in part by the League of Wisconsin Municipalities, but it failed to reach a vote.

There may be more hope now that Governor Scott Walker is on his way out, advocates said. It also helps that 76 percent of voters across 24 towns voted yes on referenda this August and November, demanding that legislators close the so-called “dark store loophole.” In the lead-up to this year’s midterms, dark store theory became a talking point among candidates for local and state office.

Still, it’s going to be tough: Don Millis, a prominent tax attorney who represents retailers and a lobbyist for the Wisconsin Manufacturers and Commerce, the top advocacy group for big business in these parts, sits on the legislative committee assigned to review the issue.

Other states have proposed legal fixes, too, but in Indiana, the one state that managed to pass anti-dark store theory legislation in 2015, lobbying pressure led to its weakening the year after it was passed. The state tax board has continued to sympathize with retailers, who keep launching appeals.

If Wisconsin managed to change its laws, Hill told me, lawyers like him would just redouble their efforts. “That’s when we’ll grab the pitchforks and get the Constitution involved,” he said.

And the judicial system? Some state supreme courts are hearing about the issue, but it seems that theirs is not always the final word. In Michigan, Escanaba has yet another upcoming court date with Menards, even though the high court rejected the retailer’s last appeal in 2017. In June, Patrick Jordan, the city manager, wrote an impassioned letter to fellow municipal leaders across Michigan, pleading for donations in support of the ongoing legal campaign.

This next decision could set the stage for tax rolls across the country, Jordan argued. “National retailers have been waiting and preparing for the Menards remand hearing due to its long-term implications,” he wrote. “This fight is a fight for all local units and not Escabana’s fight alone.” Still, it’s not clear that one state can set a precedent: A few years ago, Indiana’s state supreme court sided with a Kohl’s.

In the short term, the best bet for cities and counties may be assessors who are able to effectively resist dark store arguments by clearly explaining their methods. After his predecessor allowed a substantial reduction to a Target that appealed in 2016, Williams decided to defend his methodology against Sam’s Club and Menards. He pulled construction permits on the aging properties that the companies had presented as comparable sales, and found that they’d require millions of dollars in renovations. Running the numbers, he was able to convince the city’s tax board that the Sam’s Club and Menards were really worth about as much as the city said they were. So West Allis saved some cash. Now, though, Sam’s Club is back at it again—this time with a proper lawsuit, to be hashed out in circuit court.

As I passed sign after sign for the country’s most recognizable retailers along the Wisconsin interstates, it was hard not to weigh what communities have been getting out of the corporate retail bargain. Sprawling out to accommodate their outsize stores has brought some jobs, as well as access to discounted goods. But critics have argued for decades that island-like locations on suburban fringes devour local businesses and hollow out downtowns in communities big and small.

Their competitive edge isn’t just from lower prices: Warehouse-style retailers already tend to pay vanishingly little per square foot compared to other types of shops. And this kind of commercial development consumes all manner of hidden subsidies. (Case in point: Studies have found that Walmart stores attract more police calls than other types of businesses, yet contribute little for the extra care.) Should dark store theory prevail nationwide, the true costs associated with this retail era may balloon further.

But those engaged in the dark store struggle don’t necessarily see the big-box model itself as part of the problem. Williams, whose job is to tally up the true value these stores represent, shops at Menards when he’s not battling them. His wife loves Walmart. “It’s not like Menards is an evil company; I don’t look at it like that,” he said. He can’t blame them for trying to save a few bucks.

It was getting later in the afternoon; the parking lot outside Walmarts old and new began to fill. We watched the cars stream in for a moment. Williams shrugged. “This is what people want,” he said. “It works.”

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