Court denies UP store’s tax appeal

Order in Menards ‘dark store’ case could have statewide impact on assessments

ESCANABA — The Michigan Supreme Court on Friday rejected an appeal by a big-box retailer in a tax dispute in the Upper Peninsula, a brief but significant order that will have consequences for local governments around the state.

For the past three years, Escanaba has been in a lengthy and expensive court battle with Menards, which first appealed its property assessment in 2014. Menards claims the store’s value should be based on a closed and empty building — or a dark store.

Since Menards’ first appeal, the store has appealed additional annual assessments with the Michigan Tax Tribunal, which ruled in favor of the business and required the city and other local tax entities to refund a portion of taxes paid by Menards, as well as reduce its property assessments.

Big-box stores have been reducing their tax bills for years by convincing the Michigan Tax Tribunal that their stores are so large and unique that they should be assessed at much less than the cost of construction. The loss of revenue has led to budget cuts in many communities.

The city continued to fight the dark store tax loophole as additional property owners filed petitions to have their property assessments lowered. The city is also against deed restrictions that don’t allow buyers to use a building for its original purpose.

This spring, the Michigan Court of Appeals issued a decision favoring the city,

ruling the state tax tribunal “committed an error of law” in how it re-assessed the value of the local Menards store, which lowered the city’s tax assessment on the property by more than 50 percent.

The appeals court’s reversal of the tax tribunal’s ruling prompted Menards to file a request to bring the case heard before the Michigan Supreme Court, which heard arguments last week by lawyers for Menards and the city. But in a two-sentence order, it declined to take the case, which means a 2016 appeals court decision in favor of Escanaba will stand.

“We were pretty confident leaving the courtroom last week, just because of the interaction between the attorneys and the Justices,” Escanaba City Manager Patrick Jordan told The Daily Press on Friday.

“We’re very, very pleased about getting the official ruling,” he added.

The case now will return to the tax tribunal for more work. The appeals court rejected Menards’ valuation approach and ordered the tribunal to allow the parties to present more evidence and come up with a property value.

Groups representing local governments predict they’ll now fare better before the tax panel.

“No longer can big-box stores obtain unfair and substantial tax reductions based upon unrealistically low artificial values, while our other taxpayers contribute based upon the value of their properties,” said Stephanie Simon Morita, an attorney who wrote a brief on behalf of the Michigan Municipal League.

While the court’s decision favors Escanaba by upholding the Court of Appeals decision, the battle over the Menards tax valuation is far from over.

“It’s going to go back to the Michigan Tax Tribunal and in front of a different judge I think this time, because the Court of Appeals found errors in both of our methodologies. It might even come down to a split the baby type thing — we don’t know,” said Jordan.

Regardless of the tax tribunal’s decision, the city hopes the case will help the Legislature address the issue to prevent similar cases in the future.

“We’re hoping that the Legislature will now have some clarity and maybe a little more courage to tackle the dark store issue and we’re waiting for that to happen,” said Jordan.

Local tax revenue has been reduced by at least $100 million statewide since 2013 because of big-box appeals, according to the Michigan Association of Counties.

Menards had argued that the appeals court exceeded its authority during its review of Tax Tribunal decisions.

In the state Capitol, meanwhile, legislation has been introduced to tilt the scale to local governments in commercial property valuations.

In Dickinson County, the city of Iron Mountain recently settled a tax appeal from Northern Star Industries, the parent company of Systems Control. That settlement established the value of its property at 3201 E. Industrial Drive at nearly $3.9 million, a reduction of 62 percent from the $10.4 million valuation claimed by the city.

In June 2016, Verso Corp. had petitioned the tax tribunal to reduce the taxable value of two parcels of its pulp and paper mill in Quinnesec. This came only one year after Breitung Township officials had agreed to lower those two same parcels’ taxable value by about $20 million.

Equalization Director Sid Bray reported to the Dickinson County Board in June that several major property owners in Iron Mountain were appealing their tax assessments to the tax tribunal. Included were O’Reilly Auto Parts, Pine Grove Country Club, We Energies and Kmart. Both O’Reilly and Pine Grove reached settlements after earlier appeals but had filed again.

In 2015, the Michigan Supreme Court declined a second time to hear Breitung Township’s protest against an assessment reduction granted by the tax tribunal for Home Depot. That decision amounted to a loss in tax base for a five-year period totaling nearly $8.2 million.