Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

The ‘Dark Store’ Threat to Property Tax Revenues

Big-box retailers are using a controversial legal argument in their assessment appeals. As the courts sort it out and some legislatures step up, there’s a role for government associations to help strengthen the hands of local tax authorities.

A vacant retail property.
A vacant retail property. Big-box retailers are arguing that the market value of their profitable stores is impaired by the vacancies in competing properties. (Shutterstock)
Some big-name chain-store operators, including Walmart, Lowe's, Target and the Midwest’s Meijer, have been suing their local governments for lower property taxes on the premise of a controversial legal argument called the “dark store” theory. Localities are fighting back, but there's a need for stronger legislation to protect tax revenues.

Here’s the background: It’s no secret that retail shopping centers and some superstores have been struggling for years as consumer tastes shifted and online sales cut retail traffic. Then the pandemic made matters worse. Smaller stores and even some larger outlets shuttered, and mall owners have struggled with the “dark store” plague that erodes their rental income. Real estate investment trusts that own lower-tier mall properties have suffered stock price drops, and a few have even gone bankrupt.

The impact on municipal revenues has been a double-barreled hit, affecting both sales tax revenues and property assessment and tax appeals. For local tax assessors, the “income valuation” doctrine often requires them to at least consider, if not accept pro forma, a valuation below land and construction costs if the owners can demonstrate sustained impairment of the property’s market value, for which bankruptcies and shriveled stock share prices are clearly substantiating evidence.

But what about big-box retailers that are not going underwater? Can and should they ride on the tax-cutting coattails of their struggling competitors? That’s the issue now winding its way through various state courts and legislatures. A key to their property assessment appeals is that the market rent value of commercial real estate is impaired by the vacancies in these competing properties, even though their own stores are profitable.

Their thesis is that a checkerboard retail economy should be treated uniformly and that they should not be penalized for being profitable while their competitors benefit from lower taxes because they have dark stores. It’s something like the idea that a farmer who uses modern methods, irrigation and fertilizers (or sells an option to a land developer or an oil driller) should enjoy the same discounted land-value property assessment as the neighbor who rents their acres to the federal government for conservation.

Litigation on these property assessment appeals often boils down to a question of whether the property should be valued on its “highest and best use” rather than its “lower and worst possible use.” In other cases, a distinction is drawn between “market value” and “value in use.” Often, the legal issues are state-specific, as property assessment laws are what govern these matters at least until they reach the state supreme courts. Dark store appeals reportedly have been filed in at least 21 state courts in the past decade.

In some states, legislatures have stepped in to mandate that property assessments be based on principles that substantially weaken the dark store arguments. And the case law from one state can sometimes be cited by municipal attorneys in other states. Recently, a key victory for municipalities was a Wisconsin Supreme Court ruling that the dark store theory should not prevail in a case involving a Lowe's store in the city of Delavan. While that decision applied only to this one case, it obviously will be cited in legal briefs elsewhere.

Local assessors do not need to fight these battles alone. Their professional association, the International Association of Assessing Officers, has prepared a white paper that provides practical guidance. It’s also a topic that the national municipal lawyers’ associations (and U.S. members of the international associations) should be addressing in support of their membership.

Likewise, the state and national city and county associations can work harder with the multistate legislative policy organizations to advance model legislation that would strengthen the hands of local assessors and save taxpayers millions in legal fees, not to mention the lost tax revenue that results from over-reaching applications of the dark store theory.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Girard Miller is the finance columnist for Governing. He can be reached at
From Our Partners