Desperate Local Politicians Seek to Preserve Surreptitious Business Activities Tax
Less noticed during this year’s roads tax furore, a roiling commercial property tax dispute has exposed a widespread, sub rosa business activities tax hidden in commercial real property taxes. A hidden tax you have been paying with every purchase at big box chain retailers who occupy stores they themselves own. Big box retailers have been exposing and successfully challenging this corrupt assessing practice through the Michigan Tax Tribunal and local units of government are howling over the loss of their ill gotten revenue. Michael B. Shapiro of Honigman, Miller has been leading the charge against these bloated assessments.
Local units of government are demanding the Michigan Legislature overturn long standing real estate valuation principles and the Michigan court rulings which hold that assessed true cash value (i.e. fair market value) for tax purposes be based upon what a property would be sold for at arm’s length. They want true cash value to effectively incorporate the retail success of current owner-occupants. This artificially jacks up the property’s true cash value, its taxes, and the prices you pay at the store. Remember that businesses don’t pay taxes, customers of those businesses – in this case you – do.
Michigan’s nitwit media have deceitfully relabeled traditional true cash value assessment the ‘Dark Stores Loophole’. Local government organizations are screaming about lost revenues. Even MoveOn.org is right in there with a petition to support their favorite spenders. This is a devious effort to stampede our state’s legislators into codifying creative assessment methods solely intended to extract surreptitious revenues from shoppers. A follow on to the more blatant ‘Amazon Tax’ campaign of 2014. The State of Michigan got into your pocket last year, now it is your local government’s turn.
The term ‘Dark Stores Loophole’ was created to suggest that vacant big box stores have lower, fire sale values when compared to occupied stores. True enough, but we are discussing assessments used to determine real estate, i.e. property, taxes. Not taxes on business activity. The two creative assessment methods used most often to loot shoppers are ‘construction cost‘ and ‘imputed lease‘ calculations. Each might be valid under some very limited circumstances, but both are entirely invalid when assessing big box retailers.
The traditional Michigan method of determining a property’s true cash value for real estate taxation purposes has been a statistical assessment of recent sales of comparable, nearby properties where the full rights to use of the property are transferred from the seller to the purchaser – in fee simple interest in legal parlance. A number of municipalities have been caught way overassessing commercial properties based upon either their cost of construction or an imputed lease rate (based on sales volume) for a lease which doesn’t exist.
The construction cost basis method doesn’t inform you of what a big box property would sell for because many of the expensive features of big box store construction are actually marketing features specific to the retailer. Another retailer purchasing the property will have its own marketing features and will not want the original constructor’s marketing features. This necessitates a lot of rehabilitation and reduces the present true cash value of a property markedly from it cost of construction. Rolling those marketing features into the true cash value of a retail property violates a principle affirmed by the Michigan Supreme Court 25 years ago in Edward Rose Bldg Co. v. Independence Twp. (436 Mich. 620 (1990), 462 N.W.2d 325):
Noticeably absent from the statutory definition of “cash value” and those enumerated factors which an assessor must consider is any reference to the identity of the person owning an interest in the property or whether there are other parcels which are owned by the same taxpayer. MCL 211.27; MSA 7.27. In other words, the fact of ownership is not a germane consideration in determining value
Those marketing features are intrinsic to the constructor’s identity and incorporating the value of those marketing features in a property’s true cash value is an impermissible ‘reference to the identity of the person owning an interest in the property’. A big box retailer is not going to transfer its style and trademarks to an arm’s length property purchaser, no way. It is selling property, not a business. Nothing new here, this legal logic goes back to 1887 in Michigan.
The imputed lease value method of assessment is usually based upon the income generated by a piece of real property. Assessors use cash flow discounting of the business on the property to create a net present value. From this net present value and the P&L of similar businesses they impute a ‘market rent’ which they then convert into a property value. Michigan courts and the Michigan Tax Tribunal recognize this method, but only where an actual lease exists on the property. In the case of these big box stores, they are owned by the business and no lease exists.
Local governments have attempted to invoke sale/leasebacks and build-to-suit leases in their quest to boost assessments, but Michigan’s courts have unequivocally rejected these creative constructs. The sole purpose of assessment is to determine the value of a property in an arm’s length transaction. That a business is more successful than its peers, that it uses a sales/leaseback to free cash flows, or that it pays well for unique marketing features in its stores has nothing to do with a property’s assessed value.
The whole notion that the value of a ‘dark store’ is somehow unrepresentative of a big box property’s value is ridiculous. A ‘dark store’ is the property itself, without any business activity to enhance distort assessment. Local politicians and their flacks in the media are gaming the assessment process to produce more revenue. Revenue which comes from shoppers in this case, not the big box retailers. One of several actual reasons that Michigan retailers are having trouble competing with internet retailers in other states. The 6% sales tax is a far smaller burden on Michigan’s retailers.
Ever since the Headlee amendments to our Constitution required votes of the people for new and increased taxes, local government politicians have been fully engaged in a guerilla campaign to increase revenues without holding those inconvenient votes. Bogus fees and assessments have been their weapons of choice to surreptitiously loot Michigan residents. Our state legislators would be better served to force some measure of honesty on localities and make them go to the people with business activity tax proposals. Endorsing local politicians’ devious circumvention of Headlee doesn’t promote respect for Michigan’s laws, nor government.