Big-box stores in Minnesota fight for lower tax bills

Big-box retailers are fighting property tax bills on their megastores across Minnesota, winning reductions that could shift more of the tax burden to homeowners and renters.

Similar fights are playing out across the country, as Menards, Target, Walmart and other chains argue that their stores are overvalued by cities and counties and taxed far more than they should be.

At stake are taxes the retailers pay to local and state government, which in Minnesota could drop by an estimated $70 million to $80 million a year if current trends persist.

"We see them as community partners. But one by one by one they always seem to be challenging the property tax," said Christina Volkers, city manager of Moorhead, which partnered with Clay County to fight a Menards case up to the Minnesota Supreme Court in 2016. "So after Menards, we had Runnings, we had Target. I mean, it's just constant."

Menards has challenged the value of nearly all of its Minnesota stores in recent years, and Walmart filed 50 petitions in 2018 alone. In suburban Hennepin County, 32 of the 54 stores larger than 100,000 square feet filed petitions last year.

Many of the cases settle out of court for a reduced tax bill, but several Minnesota cities and counties have waged costly legal battles to defend their assessments.

Lower tax bills for the stores means other city and county taxpayers have to cover the difference. That shift will be more noticeable in smaller communities where a Walmart makes up a substantial slice of the tax base, compared to a large suburb.

Among stores with the largest footprints, Menards, Target, Walmart, Shopko, Mills Fleet Farm, Kmart and Home Depot have filed the most petitions in recent years, according to a Star Tribune analysis of tax court data.

The cases hinge on how local tax assessors determine the price a store would fetch in a hypothetical sale. Assessors criticize the companies for using the sales price of vacant retail buildings to determine the value of a functioning big-box store, which they dub the "Dark Store" theory.

The companies say other valuation methods are misleading. The sales prices of occupied buildings are skewed, they say, because the prospective landlords pay extra to inherit a spendy lease tailored to the unique building. And they say the massive buildings are worth far less than they cost to build, another method of determining value, since there is a limited pool of buyers.

"What are you going to do with a 200,000-square-foot warehouse in Elk River if Walmart leaves?" asked attorney Robert Hill, whose firm has represented Menards and Walmart in the cases. "They have limited utility as real estate."

Courts so far have been sympathetic to the companies' arguments, in the few cases that have gone to trial. Menards shaved a third of the value off its Moorhead store in the Clay County case — it originally wanted a 64 percent drop. The state's tax court made a similar reduction last year in a case involving a Menards in Cottage Grove, which cost the city about $80,000 in lost taxes spanning three years.

Settlements can result in refunds for back taxes, such as the $275,000 deal Winona County reached with Menards this spring.

But fighting the cases has its own costs. Coon Rapids has spent $65,000 on outside appraisers and consultants on a Menards case now awaiting a decision, and the Moorhead case cost the city and the county $200,000 to defend.

Twin Cities assessors are watching and tracking the outcomes. Some traveled to an Anoka courthouse this spring to watch arguments in the Coon Rapids case.

Each case is "a big deal, because if you've got a multimillion dollar property and you cut 12 percent or whatever of your value, it obviously affects your bottom line," Anoka County Commissioner Jim Kordiak told the County Board in June. "It's not about your bottom line. It's about what the real value of that property is and should be. Some of those entities have some pretty big money behind them to be able to push the envelope."

Whether a homeowner feels the pinch could depend on the size of the local tax base. The Walmart challenging its assessment in the small city of Dilworth outside Moorhead accounts for about 5 percent of that city's tax base.

"Already rural Minnesota is fighting a smaller tax base and at times ... declining tax bases," said state Rep. Paul Marquart, DFL-Dilworth, who wants the state House tax committee to investigate the impact on local governments. "We've got a higher percent of senior citizens, you've got farmers that are having low commodity prices. And the last thing they need are higher property taxes."

The legal team representing Menards and Walmart says the stores have actually been subsidizing the local tax base for years, however, by paying too much. Mike Wedl, a former Ramsey County assessor working as a consultant with Hill, said this became clear when more stores were sold after the Great Recession, producing voluminous pricing data. Assessors use comparable sales as one method of determining a property's value.

"Walmart, Menards — all the other big boxes — they're willing to pay twice their fair share, but not three or four times," Wedl said.

Menards declined to comment and Walmart did not respond to a request for comment. In a statement, Target spokeswoman Jacqueline DeBuse said the company follows industry-standard appraisal practices. "Target is committed to supporting the communities in which we do business, and this includes paying a fair share of property taxes," DeBuse said.

Former Ramsey County Assessor Stephen Baker, who has tracked the issue closely, said Target has typically relied on more traditional appraisal practices in its challenges — in contrast to other companies that have embraced the Dark Store argument.

Baker estimates that between $70 million and $80 million in taxes would shift to other properties if 375 big-box retail stores in the state won reductions similar to the cases that have gone to court.

"What the big-box owners are saying is, 'We need to be valued just based on the sale of vacant stores,' " Baker said. "And often times the vacant stores are vacant because they no longer function as a good store. So there's a reason there's nobody there."

He worries that the same arguments, which he calls "junk science," will be made to reduce taxes at office buildings and other property types.

Wedl disputes Baker's estimate of the revenue drop, saying the Dark Store dispute is focused on a smaller subset of extra-large big-box stores.

Attorney Judy Engel with Fredrikson & Byron disputes the notion that stores are pursuing a new appraisal method, rather than broadly accepted appraisal practices. She recently summarized this argument an article titled "The Dark Store Theory and Other Lies the Government Told."

"It's nothing new," Engel said. "The assessors have just found this great little catch phrase that sounds great in a news article. It's great marketing, but it's false."

Minnesota is not the only state grappling with big-box store tax challenges. After a spate of challenges, legislators in Wisconsin considered a change to state law last year to effectively nullify the Dark Store argument, but the measure did not pass. Lawmakers have also made efforts in Indiana and Michigan, where the challenges have also been common.

"I think it's a serious situation," said Nancy Gunderson, Clay County's assessor. "It could impact a lot of jurisdictions."