Big Box store appraisal worries
Johnson County officials have made a dicey multimillion-dollar bet: that they’re right about how much big-box stores owe in taxes, and that the state Board of Tax Appeals, Court of Appeals and Kansas Supreme Court are all wrong.
With case law and repeated Board of Tax Appeals rulings on the property owners’ side, the county’s gamble is a huge risk — one that could come back to bite taxpayers if the courts order the county to refund Walmart, Target and other big-box retailers millions in taxes. The county says potential tax revenue losses could be $80 million, though that’s an estimate that could climb.
The courts and Board of Tax Appeals have repeatedly ruled that under Kansas law, such commercial real estate must be assessed for property tax purposes according to the value of the land and improvements only.
Johnson County appraisers have argued in recent years, and continue to maintain, that the success of a business should be factored into its property taxes. Thus, from 2015 to 2017, the cumulative valuations of the county’s 11 Walmart/Sam’s Club stores rose from $95 million to $175 million — a nearly 85% increase.
Johnson County has lost five such cases in a row, and the Walmart appeal was no different: The Board of Tax Appeals ruled in June that the county had overvalued the company’s properties by a hefty $60 million.
When Johnson County commissioners still voted 5-2 last week to approve a $1.25 billion budget that relies on hoped-for tax increases on big-box retailers, dissenting commissioner Mike Brown called it “reckless and irresponsible,” saying taxpayers had been “misled” by a “disingenuous charade.” In a July 28 online post, Brown wrote, “My concerns and warnings were dismissed along the way by most in the highest levels of Johnson County government leadership with a smirk, shrugged shoulders and silence.”
Linda Terrill, a lawyer representing Walmart and other stores in such cases, has explained the requirement to tax the land and improvements, and not the business inside, this way: “If you win the lottery on Monday, your house isn’t suddenly worth more on Tuesday. And if you file bankruptcy on Wednesday, your house is still worth exactly the same thing.”
In Stephan v. Martin in 1980, the Kansas Supreme Court wrote that, “The occupation in which such property has been used by the seller is immaterial in determining the fair market value of such property.”
Those sympathetic to the property owners also note that they already pay taxes on their businesses in the form of sales, income and excise taxes.
Then there’s the Kansas statute that says, “Valuation appeals before the (Board of Tax Appeals) shall be decided upon a determination of the fair market value of the fee simple of the property.” In other words, on the property itself, not on the business inside.
Johnson County Commission Chairman Ed Eilert said he’s not familiar with the facts in the various appeals that the county has lost. But he says the state Board of Tax Appeals has apparently embraced “hypothetical” property values for big-box stores, values that run contrary to state statute and certified appraisal practices.
The Board of Tax Appeals, Eilert said, has overlooked state statutes.
Even if Eilert is somehow right, notwithstanding the state statute cited above, it’s clear the courts will have to break with long precedent and recent rulings to side with Johnson County.
Cases involving appeals by CVS and Walgreens are already at the Court of Appeals, and more appear headed that way.
Eilert and other county supporters say these cases are part of a national effort by large retailers called the “dark store” theory to get states to appraise their stores as if they’re vacant. Eilert and others are buoyed by a judge’s ruling Wednesday in Arkansas that rejected the dark store approach in a case involving Walmart stores. Supporters of the retailers counter that it was only one judge’s opinion, an “administrative non-lawyer judge” at that, and that with little evidence on the county’s side, the Arkansas ruling has “the significance of a bye win in a tennis tournament.”
While this clash of titans makes for great drama and more fodder for the courts, it may not end well for Johnson County taxpayers and taxing entities if they find the county vastly overestimated potential tax revenues.
As it is running uphill in this battle, the county might want to consider negotiating settlements with the big-box stores. It might save all the parties money.
While noting the two are good friends, Brown differs sharply with his commission colleague Eilert: “The retailers have the current law on their side,” Brown said. Recent history, too.
Five Johnson County commissioners think the law is on their side. And they’re making a dangerous bet on millions in taxes and a good bit more on litigation to prove it.