Saturday, November 17, 2018

Dark Store Theory

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. (...)

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. (...)

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. (...)

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.”
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.

by Laura Bliss, CityLab |  Read more:
Image: Madison McVeigh/CityLab
[ed. See also: Amazon’s Long Game Is Clearer Than EverAmazon last year effectively paid nothing in federal tax. Worse, thanks to the tax cut approved by Donald Trump, who ironically has ripped Amazon for not paying taxes, the company will reportedly receive a one-time $789 million windfall for last year — in addition to the goodies it just received this week. (Rolling Stone)]