How much should big-box stores pay in property taxes? Debate rages in Kansas — and could impact taxpayers.

Andrew Bahl
Topeka Capital-Journal
A recent Kansas Court of Appeals decision has underscored the long-running debate over how much big box retailers, such as Walmart, Lowe's or Menards, should pay in property taxes.

The phrase "dark store" sounds more like part of an elaborate Halloween prank, or perhaps a haunted house or plotline in a horror movie. 

Instead, the phrase refers to a seemingly arcane debate over property taxes — only the issue has major ramifications for taxpayers, Kansas municipalities and some of the country's most prominent retailers, such as Walmart, Target and Home Depot.

The fight, which has raged in Kansas and scores of other states, boils down to how big box stores should be considered for property tax purposes. Municipalities have attempted to appraise the properties as if they were occupied and raking in revenue, with the valuation tied into the value of a building's lease.

But retailers have fought this determination, both before the Board of Tax Appeals and in the court system. They argue the store should be valued as if it were empty, with the appraisal reflecting how much a property would fetch if it were sold on the open market without a tenant. That value is generally much lower.

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The latter argument has prevailed in recent years. Most recently, the Kansas Court of Appeals upheld a ruling last week that would cut the valuation of a chain of Walmart and Sam's Club stores by roughly $60 million in 2016 and 2017.

The tussle has frustrated municipalities. They fear that consistently lowering the value of the biggest commercial properties — which can account for between one-third and half of all property tax revenues in some counties — will have a major impact on how much homeowners and small businesses pay going forward.

But shining light on the "dark store" issue might mean unwinding a complicated web of other, structural tax debates — a process likely to take considerable time.

"Something's got to happen if you shrink the base and all that money is leaving," said Rep. Jim Gartner, D-Topeka, the top Democrat on the House Taxation Committee. "Where do you make it out?"

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Series of rulings statewide go in favor of big-box retailers

The Kansas Court of Appeals ruling is just the latest in a string of victories for big-box retailers, though the fight over how to value big-box stores has been most acute in suburban Johnson and Wyandotte counties.

In April, that court also ruled in favor of reducing the property tax bill for a Bass Pro Shops in Olathe. And last month, the Board of Tax Appeals shaved off $1.5 million for Nebraska Furniture Mart in Kansas City, Kansas.

But other counties have also raised the alarm after seeing tax rulings go against them. Riley County, for instance, was required to refund Home Depot $150,000 in March. And one of the original dark store cases stems from a 2012 dispute involving a Topeka Best Buy store.

For Kieran Jennings, vice president of the American Property Tax Counsel, the "dark store" label is a misnomer.

He said the only way to fairly assess value is to apply the "fee simple" standard — a term in common law that refers to land or home ownership — evenly. That means not taking into account a property's lease or other elements when figuring out how much it is worth.

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Jennings argued this is exactly how everyday residents or small businesses have their properties assessed. Moreover, he said considering a lease signed a decade ago — or more — would skew the assessment, which is supposed to outline a property's value at the beginning of a given year.

"Clearly, it would be incorrect to tax one person under one measurement, and another person under completely separate measurement," Jennings said.

The court of appeals ruling largely echoed this rhetoric, arguing that upholding Johnson County's arguments would fly in the face of legal precedent in Kansas.

“Although we understand the county’s incentive to do so in order to increase its revenue at the expense of Kansas taxpayers, we respectfully decline the invitation to implement such a major shift in tax policy,” Judge David Bruns wrote in the majority opinion.

Will homeowners be on the hook for higher taxes?

Shawnee County Appraiser Steve Bauman said his office would abide by court rulings on the dark store issue — but that doesn't make them accurate in his mind.

He argued the value a buyer could get out of a potential lease played a role in determining how much a person was willing to pay for a property. Given that, Bauman argued it was only fair to consider that element during the appraisal process.

"As an appraiser, it doesn't necessarily make any difference to me," Bauman said. "Because I'm going to appraise the way the laws and the courts tell us. I just don't think it's a fair scenario."

What is clear to Bauman and other officials across the state is a significant shift in how big-box stores are valued will have an impact on city and county budgets.

In 2018, Johnson County estimated a uniform application of the dark store theory would result in a $133 million loss in revenue.

In Shawnee County, commercial property makes up 15% of property values countywide. But because owners of commercial land pay a higher tax rate than residential homeowners, the hit to the tax base could be far higher.

Municipalities have insisted this means residential homeowners and small business owners will wind up paying more in their property taxes.

"It will shift the taxes to homeowners, the other classes of property," Bauman said.

For his part, Jennings acknowledged there was some truth to this argument as assessors correct property values that may have been overinflated. But he noted municipalities have been forecasting doom and gloom about the issue for many years.

Ultimately, he argued the system must be fair.

"You wouldn't expect your house that was once worth $100,000, if it's now all of a sudden worth $50,000, for you to be taxed as if it's still worth $100,000, even if you're still living in it," Jennings said.

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COVID-19, court fights expected to keep dark store debate alive

The Legislature has been busy on tax issues in recent years, but they have not felt the need to change the status quo on this issue, with Sen. Caryn Tyson, R-Parker, the chair of the Senate Tax Committee, arguing the courts were interpreting the statutes as the Legislature intended.

Lawmakers did pass a provision last session eliminating the ability for real estate appraisers to be certified via the International Association of Assessing Officers — in large part due to the group's opposition to the dark store theory.

"This is not happening all across Kansas, this is only happening in a few areas," Tyson said. "But depending on whose name is on the building, it's impacting their property taxes. That should not be the case."

Others have believed the Legislature should play a more active role on the issue. But Gartner, the Topeka Democrat, said doing so would require addressing a host of other property tax issues at the same time, something he feels lawmakers probably won't be able to do in a timely manner.

"We'd need to take a deep dive on all the parts that go into property taxes," he said.

It is unclear if Johnson County will appeal the recent court decision, sending the matter to the Kansas Supreme Court for the first time. A spokesperson for the county said they are still reviewing the decision and would clarify their plans once that is complete.

In the meantime, the issue is unlikely to go away anytime soon. The COVID-19 pandemic has changed the market for retail property in a way that could fundamentally alter property tax matters going forward.

While property tax revenues are generally viewed as relatively stable during times of economic uncertainty, the expansion of online shopping during the last year could adjust the demand for large, brick-and-mortar stores.

The effects could be even more dramatic, Bauman said, if apartment complexes and other businesses attempt to make a similar dark store argument.

"I see it as the first domino of a larger tax shift," he said.

Andrew Bahl is a senior statehouse reporter for the Topeka Capital-Journal. He can be reached at abahl@gannett.com or by phone at 443-979-6100.