How the “dark stores” loophole helps big-box retailers evade millions in property taxes

Wisconsin voters just sent Governor-elect Tony Evers a clear message: End the practice that allows thriving Walmart supercenters to be taxed like shuttered stores.

Over 800,000 Wisconsin voters on Tuesday sent a message to Democratic Governor-elect Tony Evers: Close “dark store” loopholes that allow thriving big-box stores, like Walmart and Target, to be taxed the way vacant and abandoned stores are. The voters passed advisory referendums, or statements of support, in 23 counties, cities, and towns across the state during this midterm election—and though these measures aren’t legally binding, they help put the issue officially on the new governor’s agenda.

Since 2013, national retailers have successfully sued local governments in Midwest states to lower their property taxes. They claim that assessors shouldn’t determine their stores’ property value based on what they cost to build, or how much money the stores are taking in. In other words, they shouldn’t be taxed like occupied, functioning stores. Instead, say the stores (which also include supermarkets like Meijer, hardware stores like Home Depot, Lowe’s, and Menards, and pharmacies like CVS and Walgreens), the tax assessments should be based on what comparable stores sold for elsewhere. And that’s where things get tricky. For comparison, they’re pointing to so-called “dark stores”—those empty supercenters that blight small-town America.

Wisconsin retailers sought hundreds of millions in “dark store” tax revenue between 2014 and 2017.

The tactic saves those national retailers a lot of money. According to an analysis by USA Today’s Wisconsin network, more than 100 suits were filed against the state’s local governments between 2014 and 2017. Menards had challenged its tax assessments in 43 such cases in Wisconsin, while Walgreens and Walmart followed with 20 and 12 cases filed, respectively. When the analysis was published, 67 cases were unresolved. The retailers were collectively seeking over $700 million in tax revenue.

Scott Winter is president of the Wisconsin affiliate of the International Association of Assessing Officers, which has lobbied in support of two failed bills to close the loopholes. In response to a rash of litigation in that state and others in the Midwest, the parent organization issued a position paper which suggested that, if the dark store theory is to be believed, “a property is already functionally obsolete as soon as it is constructed.”

According to Winter, it’s common for stores to restrict, or “encumber,” the “bundle” of property rights that come with a deed when they sell or lease a location. Those restrictions—which prevent a supermarket from moving into a property built to be a supermarket, say—contribute to driving down the property value. As a result, dark stores are often worse than derelict. Legally, those properties can no longer be what they were built to be.

The “dark stores” loophole allows retailers like Walmart and Home Depot to evade millions in property taxes—by claiming their supercenters are no more valuable than abandoned stores.

These restrictions, meant to ward off competition, have been criticized for cutting off access to food in small towns. In Bellingham, Washington, the only full-service supermarket has been vacant for over a year, since the parent company, Albertson’s, moved the store three miles outside town, and refused to rent the space to anyone selling food. Walmart employs similar deed restrictions: when it sold its 200,000-square-foot Brownsville, Texas location in 2016, the purchaser, a local developer, agreed not to convert it into a grocery store or discount department store. The property is now a shelter for migrant children. The restrictions are an especially galling aspect of dark store lawsuits, as retailers are arguing their active stores should be taxed like ones they intentionally deprived of future value.

“What those [retailers] are suggesting is that we use these dark stores as comparables to their ongoing stores, even though the bundle of rights is different,” Winter says. But “to use that as a comparable, without an adjustment, for the value of an ongoing operation, doesn’t square with appraisal theory. And that’s really the heart of the matter.”

How did this tax dodge strategy become a loophole—and specifically, the two loopholes that voters around the state asked Wisconsin to close?

One loophole stems from a 10-year-old Wisconsin Supreme Court ruling. In 2008, the state ruled in Walgreens vs. City of Madison that the amount the drugstore paid to rent a location didn’t reflect its market value. Instead, it said, the property should be valued at the amount the landlord could get if Walgreens moved out. In Wisconsin, nearly 300 pharmacies can take advantage of that ruling. The second loophole is based on the premise that Winter described—the idea that the value of a new store should be the same as a vacant one. That’s what happened in 2010, when a judge agreed that a Target store in Novi, Michigan, was worth only half its valuation. As a result, between 2012 and 2016, Bloomberg reported, Michigan counties lost more than $75 million in property taxes.

That theory hasn’t been officially endorsed by Wisconsin courts, but it’s been embraced by the state’s big-box retailers anyway. And in recent years, as the Post-Crescent explains, they’ve used it as the basis to sue for lower tax assessments. Between 2014 and 2017, the paper found, retailers brought 130 dark store cases in “every corner of the state, spanning the retail-heavy Milwaukee suburbs, the Fox Valley and the Wausau and La Crosse regions.” The retailers often prevailed. Of those cases, close to 60 towns, cities, and villages ended up settling out of court, and paying the retailers’ tax refunds.

The refunds can hurt local governments’ ability to provide public services like education.

Robert Hill, who represented Walmart when it sued Sheboygan County to lower its assessment, says the stores “are selling for a fraction of the assessments…. The assessors are literally ignoring valid market sales because they want to prop up their tax base by having these guys pay more than what they can sell their building for.”

Now, though, many Wisconsin voters are saying enough. The League of Wisconsin Municipalities, which has supported two bills to close dark store loopholes, says property taxes are capped, by state law, at a specific level. The association argues that homeowners and small businesses are being forced to carry a larger share as big-box retailers slough off, and that refunds can hurt local governments’ ability to provide public services, like education.

The Post-Dispatch looked at the village of Howard, in the suburbs of Green Bay, as an example. There, the hardware store chain Menards claimed, in court filings, that one of its stores had been overvalued by around $4.8 million. The company wanted the Howard-Suamico School District to refund it $55,000 in tax revenue—twice, for each year it was overassessed. Menards didn’t get that refund, but going forward, the store will be assessed at the value that it sought: down from $10.6 to $5.8 million.

“In the district, which has about 6,100 students, $55,000 could pay for two or three special education aides, computers and furniture for three classrooms, or the salary and benefits for a teacher early in his or her career,” the paper ruefully reported.

So what’s next? Nothing, officially. Fewer than one-third of Wisconsin’s 72 counties passed measures, after all, and these don’t have legal clout. At the same time, statewide efforts have so far been unsuccessful: Two loophole reversal bills died in the state legislature last year. Still, supporters are encouraged by the results. “It’s an advisory referendum so it’s not going to change the law at all but it certainly, I think, speaks volumes,” said Outagamie County Board Chairman Jeff Nooyen, where the referendum passed with about three-quarters of the vote. “That’s pretty significant when you’ve got 50,000 voters telling their elected officials that we want this loophole closed.”

Sam Bloch is a contributing writer for The Counter, where he covers business, environment and culture. He has also written for The New York Times, L.A. Weekly, Places Journal, Art in America and other publications, and is currently working on his first book, a work of narrative nonfiction about shade, for Random House.