A decision that could mean the difference in millions of dollars of tax revenue to Johnson County, its cities and school boards looms ahead as the Kansas Supreme Court prepares to hear a “dark store” case on Thursday.
• The Kansas Supreme Court will hear Johnson County’s appeal of a lower court’s ruling upholding a state tax appeal board’s decision that the county owes Walmart $60 million in overpaid property taxes.
• Walmart successfully used the so-called “dark store theory” in arguing that the county had overvalued 11 of its properties in the 2016 and 2017 fiscal years.
• If the high court upholds the ruling, local taxing jurisdictions — including cities and school boards — could see hits to their annual tax revenues.
At the center of the case is the method the county used to appraise values on big box commercial real estate — specifically, 11 properties occupied by Walmart and Sam’s Clubs in 2016 and 2017.
In a move that has been a trend by big-box corporations across America, Walmart challenged the county’s valuations, using an argument that has become known as “dark store theory.”
Another name for it is “hypothetical lease.” Corporations like Walmart maintain the fair market value for property tax purposes should be focused on the bricks and mortar, and not the value of the lease.
Therefore, hypothetically, a busy store would be valued similarly to one that is vacant or “dark,” given equivalent building stats.
Proponents of this argument say it shouldn’t matter, for property tax purposes, whether the building is empty or not. Tax attorney Linda Terrill, quoted on NPR in 2017, said “If I win the lottery the value of my house doesn’t change.”
Using that reasoning, a similar store – vacant or not – could be used as a comparable value by which open stores could challenge their appraisals.
But Critics have said bricks and mortar don’t tell the whole story, and that vacant businesses might not make good comps because of other problems like location, that could affect their value.
Since big box retailers began challenging their property taxes around six years ago, government officials have kept a close eye on the court cases because of their potential to require refunds of commercial property tax already paid and their impact on future tax revenues.
The Kansas state Board of Tax Appeals ruled the county’s taxing method meant the Walmart stores overpaid by $60 million. That ruling was upheld later by the state Court of Appeals.
The state supreme court will now consider the finer legal points of both arguments on Thursday.
In asking for a hearing, the county said the tax appeal board relied too heavily on another Kansas case, “In Re Equalization of Prieb Properties,” for its decision.
The county’s legal staff said the BOTA decision incorrectly limited the use of other factors, like build-to-suit lease information, as a determinant of value.
Other methods of appraisal ought to have been considered, the appeal document said. Also, the Court of Appeals stepped outside its judicial review function by ruling on “matters of generally accepted real estate appraisal” rather than sticking to points of law.
The county’s appeal also noted a dissenting opinion by appeals court Judge Steve Leben.
In that opinion, Leben wrote, “It’s time that we back away from the sweeping pronouncements made in Prieb on issues of real-estate appraisal, not law. By doing so, we would once again let the tax valuation of real estate be decided on a level playing field before the Board of Tax Appeals, which has the expertise to fairly judge the real-estate appraisal testimony presented to it. “
The hearing begins at 9 a.m. Wednesday and can be viewed on the court’s YouTube channel.
Roxie Hammill is a freelance journalist who reports frequently for the Post and other Kansas City area publications. You can reach her at firstname.lastname@example.org.