The Dark Store Debate

A zoning amendment that will allow a Costco store to be built on Cherry Capital Airport property appears headed for approval Monday after city commissioners reviewed the project this week.

But the development has also raised concerns among some about a practice known as “dark store” assessment. The legal loophole is used by big-box stores to reduce their property taxes. In the last decade, Michigan communities have lost tens of millions of dollars to the practice -- funds critics say could have gone to fire and police departments, roads, city utilities and schools.

So how exactly do “dark store” taxes work and how might they impact Traverse City?

The Dark Store Debate
When determining how much a store like Costco should pay in property taxes, assessors usually consider factors like the company’s construction costs and income, as well as the “highest and best use of the property.” But in recent years, chains including Meijer, Lowe’s, Sam’s Club, Target, Home Depot and others have successfully argued that their taxes should be based on “comparable properties” – specifically, vacant former big-box stores.

Because such stores are sitting empty and obsolete – or “dark” – their value is often drastically reduced. In addition, many national retailers place deed restrictions on their buildings to prevent competitors from coming into the market behind them once they’ve left a property. Those deed restrictions further reduce a property’s value.

In a presentation to city commissioners Monday, airport attorney Karrie Zeits said that calculating taxes using a dark store formula slashes assessed values from $50-$80 per square foot to $25 per square foot. “What does this mean for Costco?” Zeits said. “They could – and they may – appeal their taxes (in Traverse City). They’ve done so in other communities.”

Zeits said the lowest assessed value she found for a Costco through the Michigan Tax Tribunal was $2 million. Should that rate apply to a Traverse City store, Costco would pay $110,940 in property taxes annually, with the city receiving roughly $22,000. Even at that "worst-case scenario" value, the store would still be generating new taxes for the community on land that’s currently generating none. But Costco’s payments toward local services could be triple that amount – or higher – if the dark store method wasn't used to calculate its taxes.

The issue is one that's already affected neighboring communities. When asked which big-box stores have appealed their tax rates in Garfield Township – where the majority of such stores are located locally – Township Assessor Amy DeHaan says "they all have.”

In 2011, for example, Lowe’s appealed and got its taxable value lowered from $4,161,258 to $2,973,150 – a decrease of nearly one-third. Walmart followed suit in 2014, successfully appealing to have its taxable value lowered from $3,414,552 to $3,286,252. “If (stores) feel they can get a deal or a reduction (from the Michigan Tax Tribunal), they’ll try to do that,” says DeHaan.

The practice has become particularly challenging for communities that have already collected and spent tax revenues – only to be ordered months or years after the fact to refund money to companies who’ve successfully appealed their tax rates.

“I’ve seen townships go belly-up real quick (because of) it,” said City Commissioner Richard Lewis. “It’s a risk.”

The Fix
So what’s the solution?

On a local level, officials’ options are limited. “Understand, it’s a basic right to be able to appeal to the tax tribunal for any taxpayer,” City Manager Marty Colburn told commissioners. Communities that attempt to restrict tax appeals can quickly find themselves facing legal challenges.

Airport officials plan to protect the actual property value of their site by prohibiting Costco from placing deed restrictions on its building. “We have to always maintain the right for the airport to make income (on that parcel),” says Airport Director Kevin Klein.

Airport and city officials agree that the most effective solution for dark store issues will likely lie with state legislators.

Lawmakers will meet in Lansing today (Wednesday) to debate House Bill 5578, which would tighten tax tribunal rules and generally prohibit using vacant properties as a comparison for valuation. Colburn said Rep. Larry Inman told him the bill is generating “a lot of interest” among state legislators. As city commissioners move forward with the airport zoning amendment, they could also consider partnering with neighboring townships to lobby for the bill’s passage. Commissioners expressed support Monday for doing just that, a move that was also encouraged by the Traverse City Area Chamber of Commerce.

“I think the best thing we could do right now is put our support (behind this legislation),” Lewis said. “We’ve got to be on top of our legislators to fix the bigger statewide problem. We can’t fix it locally…but (supporting the bill) might make a difference.”