Local government officials say a proposed change to how big box retail stores are taxed — a method called “dark store theory” — would be as ominous to the county’s homeowners as it sounds.
Big box retailers like Target and Menards are pushing for changes to state tax policies that could save them millions, but local leaders are objecting over fears that such a change would cause residential property owners to pick up a larger share of counties' tax burdens.
Douglas County Appraiser Steven Miles said the concept would appraise large retail outlet stores for their vacant lease value rather than their current use. Miles is estimating that would reduce the tax values of big box retailers in Douglas County by 36 percent.
“I don’t agree with the methodology,” Miles said. “If a property is occupied, it’s worth more than one that is vacant.”
Counties are required to determine a fair-market value for all properties, meaning the amount the property likely would sell for if it were put on the market. For many commercial properties, that fair market value is established by looking at how much income the property is producing for its owner. Retailers now are contending the tax value should be based solely on how much the building would lease for on the open market.
The home-improvement giant Menards first sought the appraisal change in its home state of Wisconsin and remains an advocate with Target, Walmart, Walgreens and other retailers, Miles said.
Target has recently brought the fight to Kansas. Of concern to Miles and Assistant Douglas County Administrator Sarah Plinsky was a Feb. 21 summary decision the Kansas Board of Tax Appeals handed down favoring seven Target stores in Johnson County. The Target stores appealed on the basis of the dark store theory, they said. The ruling found the Johnson County Appraiser overvalued the properties by at least 30 percent for 2016.
Kansas Board of Tax Appeals findings can become established precedent, although the ruling appeared to be at odds with state statute, Miles said.
With so much at stake, the ruling is likely to be appealed.
Arlen Siegfreid, executive director of the Kansas Board of Tax Appeals, said the board would follow up its summary decision on the Johnson County Target stores with a complete written ruling with legal reasoning before late May. Either party could appeal the ruling to the Johnson County District Court or the Kansas Court of Appeals.
The Johnson County Target stores appealed their 2016 valuations after they were among the 53 stores in the county with valuation increases of at least 50 percent from the year before, Miles said.
A representative of Target said Tuesday there's good reason why the company's stores should be taxed differently.
“The problem is, the Johnson County appraiser is valuing who is in the store. He is taxing Target stores at a higher rate because they are doing well and doing something right,” said David Lennhoff, a Washington, D.C.,-based consultant who testified on behalf of Target before the tax board. “You wouldn’t expect to have to pay more taxes on your house because you make more money than the people next door.”
Lennhoff said he wasn’t familiar enough with tax appraisal practices on commercial properties in other Kansas counties to know if the ruling had wider implications in the state.
Douglas County commercial properties haven’t witnessed the kind of spike in value that prompted Target's appeal in Johnson County, Miles said.
“We have a good relationship with our retailers,” he said.
Should the dark store theory appraisal method be adopted statewide, it would have large consequences for local budgets and homeowners, Plinsky said. Cities, counties and school districts would confront the difficult choices of reducing spending and/or services to reflect the loss of revenue or significantly shifting the tax burden to residential, industrial and agricultural properties.
Lawrence Mayor Stuart Boley and Douglas County Commission Chair Nancy Thellman have sent letters to State Sen. Caryn Tyson, chair of the Senate Assessment and Taxation Committee, asking the Legislature to oppose any move to enact the dark store theory.
Tyson’s committee has had hearings earlier this year related to property taxes and commercial real estate valuations, but the Legislature is not poised to adopt the dark store theory or other such changes, said Sen. Tom Holland, D-Baldwin City, who is the ranking minority member of the Senate Taxation Committee.
Current appraised value of Lawrence big-box commercial properties
• Pine Ridge Plaza (Kohl's, Ross, Famous Footwear, Maurices, Bed, Bath & Beyond, T.J. Max, World Market, Bath & Body Works), 3230 Iowa St., $20.45 million
• Dick's Sporting Goods, Boot Barn, Pet Smart, Ulta Beauty, 2727 Iowa St., $17.4 million
• Walmart, 3300 Iowa St., $14.12 million
• Menards, 1470 W. 31st St., $12.75 million
• Walmart, 550 Congressional Drive, $10.02 million
• Target, 3201 Iowa St., $9.89 million
• Former JC Penney's store, 3311 Iowa St., W. Sixth St., $6.02 million
• Home Depot, 1910 W. 31st St., $6.01 million
Source: Douglas County Appraiser's Office