Big-box chains benefit from the fire and police protection and infrastructure provided by our municipalities. Their employees and their children benefit from the public education provided by our schools. The retailers who benefit from those investments should pay their fair share, not push more of the cost onto homeowners and small businesses.
But all over the country, large retailers such as Walmart, Home Depot, and Lowe’s have successfully used “dark store theory” to challenge local assessments and slash their property tax bills. Major corporations are beginning to roll out this tactic in Maine: Since 2015, six retailers (Walmart, Lowe’s, Walgreens, Sam’s Club, Best Buy, and BJ’s) have requested $184 million in valuation reductions since 2015.[1]
Today the Legislature’s Taxation Committee heard public testimony on a bill, LD 2045, sponsored by Rep. Ryan Tipping of Orono, that would block these large corporations’ effort to rewrite the property tax code for their own benefit. MECEP supports LD 2045 because it would stop the dubious “dark store theory” in its tracks, protecting municipal property tax bases and guaranteeing that large retailers pay their fair share.
How dark store theory works
Large-scale retail is big business. The top 10 large retailers nationally reported more than $1.1 trillion in sales in 2018.[2] But lawyers for big-box retailers say communities should ignore this reality on the ground. They say towns should instead assess their properties as if they were shuttered and vacant “dark stores” in economically undesirable areas.
This is like arguing that your home should be assessed as if the neighborhood had fallen on hard times and everyone had moved out, even if today you live in the most popular, vibrant part of town.
Property taxes are supposed to be based on an apples-to-apples comparison between the property in question and similar situated properties. Dark store theory instead asks local assessors to compare fresh fruit to rotten vegetables.
Part of the argument made by dark store theory is that large retail properties are unappealing to buyers when they hit the market. Large retailers argue their valuation should reflect the much lower value of these dark stores — even while they are still open for business.
Essentially, they say communities should ignore the current value of their property and tax them based on what it would be worth when market conditions at their location are no longer favorable.
Ironically, difficulty selling big-box retail properties is at least partially the result of anti-competitive practices by the retailers themselves. Big-box retailers use restrictive covenants to prevent competition, with the added effect of deflating the value of big-box stores on the open market.[3]
For example, imagine a Walmart closes in one community because the parent company is opening a new Walmart Superstore in the next town over. Walmart’s restrictive covenant on the original property protects it from competition by preventing another large retail business, such as Target or Costco, from opening a store there.
These tactics don’t just protect big-box retailers from competition. By preventing other large retailers from buying vacant big-box stores, these anti-competitive practices drive down the prices of their property on the market. In other words, these corporations are knowingly deflating the future value of their properties, then asking for a tax cut today to reflect the conditions they’ve created in the future.
There’s still time to stop dark store theory from taking hold in Maine
Dark store theory is relatively new but is gaining ground across the country. The theory was first successful in a handful of Midwestern states, where it has been used to slash local valuations by hundreds of millions of dollars. Ambiguity in state assessment laws have led to some state courts allowing dark store assessments to prevail at great costs to local communities. In Michigan, for example, dark-store appeals cost local budgets $100 million between 2013 and 2017.[4]
A 2019 MECEP survey of the Maine towns with the highest retail receipts showed that large retailers are asking for dramatically reduced assessments in line with those sought under dark store theory.[5] Large-scale retailers have requested at least $184 million in reduced property value over the past four years. Those retailers are requesting valuation reductions of between 14 percent and 56 percent, with an average requested reduction of 34 percent.
In our research, we found that Maine assessors have been largely successful in defending their assessments or settling on abatements that are a fraction of what the retailers sought. When appeals did result in a reduction, the average granted reduction was about 8 percent of property value.
However, Maine should not leave assessors as the lone line of defense against corporate tax avoidance. Large retailers have proven elsewhere that they are willing to challenge local decisions if they believe a court would grant them a more favorable outcome. And once that happens, it’s much harder to put the genie back in the bottle.
Dark store theory exploits a lack of clarity that exists within state assessment laws. LD 2045 would clarify the kinds of property comparisons that should be used in local assessments.
While this bill retains the right of any property taxpayer to challenge their assessment, it establishes guardrails on which comparable properties can be used to arrive at a fair assessment. That clarity will protect municipalities and other property taxpayers in the face of consistent assessment challenges by retail corporations.
I urge the committee to support legislation that promotes a fair assessment process for all businesses and households in Maine. I urge the committee to support LD 2045.
End Notes:
[1] Austin, Sarah and Mario Moretto. “Dark Store Theory: Big-box stores rolling out new effort to get out of Maine property taxes.” October 31, 2019. https://www.mecep.org/wp-content/uploads/2019/10/Dark-Stores-Report-Final-for-Distribution-103119.pdf
[2] National Retail Foundation. “Stores top retailers 2019.” Stores. Accessed October 25, 2019. https://stores.org/stores-top-retailers-2019/
[3] International Association of Assessing Officers. “Commercial big-box retail: A guide to market-based valuation.” September 2017. https://www.iaao.org/media/pubs/Big-Box_Paper_Sept17.pdf
[4] Hamilton, Billy. “Tax loopholes coming and going.” Tax Notes. September 10, 2019. https://www.taxnotes.com/taxnotes-today-state/nexus/tax-loopholes-coming-and-going/2019/09/10/29v7r
[5] Austin and Moretto, 2019.
