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U.S. Big Box Retailers’ 'Dark Store' Practices Continue To Pressure Some Local Governments’ Finances


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U.S. Big Box Retailers’ 'Dark Store' Practices Continue To Pressure Some Local Governments’ Finances

The COVID-19 Pandemic And Growing E-Commerce Have Challenged Some U.S. Brick And Mortar Retailers

Over the past 20 years, there has been a seismic shift in the U.S. retail sector and the way American consumers shop. With the advent of online retail and the emergence, and now dominance, of online mega-retailers such as Amazon, e-commerce sales have represented a growing portion of total U.S. retail sales since 2000. More striking to S&P Global Ratings, however, is the speed with which this change has come about. Data from the Census Bureau's quarterly e-commerce reports show that at the start of the 21 century, e-commerce represented only about 1% of total retail sales. Since then, growth in online sales has either remained stable or increased as a share of total retail volume in almost every quarter since 2000, reaching 11% in 2019.

Because of the pandemic, growth of e-commerce sales has further accelerated over the past year as stay-at-home orders and social distancing practices led consumers to shop online. The Census Bureau data show that, while e-commerce is still only a fraction of total sales, total annual e-commerce sales accounted for 14% of total retail sales last year, representing 30% year-over-year growth from 2019.


The spike in e-commerce sales and other ongoing effects of the pandemic have had varying consequences for big box retailers. Many large retailers specializing in bulk buying and offering a variety of goods, such as food and household items, were deemed essential businesses early in the pandemic and remained open. Retailers including Target Corp., Walmart Inc., and Costco, quickly adapted to social distancing requirements by implementing curbside pickup and other distanced practices, making it easier for consumers to meet most of their shopping needs at one location rather than risking potential exposure to the coronavirus by visiting multiple stores. Other large retailers, including anchor stores in malls and those specializing in clothing and electronics (such as Neiman Marcus, JC Penny, and Guitar Center), were forced to close stores or file bankruptcy as consumer demand dropped.

The overall growth of e-commerce sales over the past two decades suggests that the future of American shopping is increasingly likely to mean buying remotely from an online retail website and is less likely to include physically visiting a store. While at least a portion of online sales could eventually return to brick and mortar retailers post-pandemic, the 2020 spike in e-commerce sales suggests that the pandemic might have contributed to the acceleration of an already growing preference for online shopping. Many consumers have changed their buying habits (perhaps permanently) in favor of the relative safety and convenience of shopping online.

Hoping To Lower Property Tax Bills, Big Box Retailers Are Appealing Assessments Using 'Dark Store' Tactics

Growing competitive pressure from e-commerce sales has corresponded with brick-and-mortar big box retailers implementing what is referred to as the "dark store theory," a name given to a tax avoidance strategy used by retailers to lower their property tax bills. In essence, big box stores have argued that their in-use stores should be assessed for property tax purposes at the same level as vacant stores, known as "dark stores." They argue that even new stores are functionally obsolescent from the time they are constructed because they have certain design features, built to suit the original tenant, and are too large to be easily repurposed. Features such as size, layout, façade, and signage are all unique to the original user and, as a result, these retailers argue that property is less valuable to a second-generation buyer, which depresses the resale value of even a newly constructed building.

Because of the purported functional obsolescence of their properties, big box retailers argue that the most appropriate valuation method for their properties is the sales comparison method, where the value of the property is determined by analyzing the selling prices of comparable properties, analogous to the calibration used for home values that looks at recent selling prices of similar homes in an area. The sales comparison approach downplays the significance of other factors that have traditionally been weighted more heavily in the valuation of commercial properties, such as the income generated by the property or its construction cost. Using the sales comparison approach often results in a much lower valuation that can cause a store to eventually sell to a second-generation buyer at a steep discount relative to its total cost of construction.

Dark store critics have pointed to other factors that play a critical role in depressing the resale value of big box stores, in particular, store location and deed restrictions. If a store in a specific location goes out of business, the location itself could be at least partly to blame, and a lower resale value might reflect the less-than-ideal location for doing business. Big box stores also commonly place deed restrictions on their buildings designed to limit potential buyers' uses of the property for a specified period to prevent direct competitors from purchasing and refurbishing an existing structure at low cost. These deed restrictions further limit the pool of buyers for a vacant big box store, thereby depressing its resale value. For varying reasons, big box stores typically sell at only a fraction of the construction cost or of the income generated by the in-use property, and the use of sales comparison data in big box tax appeals--the hallmark of dark store theory--has enabled retailers to systematically pursue tax appeals in certain parts of the country, in some cases to considerable effect. As a result, successful sizable or recurring tax appeals can pressure local governments' operations, reserves, and liquidity, and could result in weaker credit quality.

The Potential For Imbalances In Local Governments' Finances Grows As Tax Appeals Multiply

Dark store theory emerged most conspicuously in a number of Midwestern states, including Michigan, Indiana, and Wisconsin, in the aftermath of the Great Recession and has resulted in widespread and pervasive store devaluations. While dark store tactics have, in many cases, proven effective in the Midwest, big box retailers are applying these tactics in an expanding number of states, including Maine, North Carolina, Kansas, and Texas.

The outcome of specific property appeals can be wide-ranging, with some of the larger appeals resulting in store values declining by half or more. One example of the scale of the issue was reported by the Michigan Municipal League in which a typical Michigan Lowe's store is now assessed at $22.10 per square foot, compared with $79.08 per square foot in North Carolina, where the company is headquartered. And even if a single tax appeal is inconsequential when considered on its own, the cumulative effect of multiple years of appeals across a large number of big box properties can result in a significant loss of property tax revenue across a state and, more important, it can deprive local taxing jurisdictions of tax dollars that would otherwise be used to fund operations, service debt, and keep up with demand for investment in public infrastructure.


One way or another, a dark store appeal will likely cost a local government money: be it the potential cost to defend against the appeal (if an appeal occurs or recurs) or from the potential loss of future property tax revenues (if the appeal is successful). Cities, counties, and school districts' finances can be pressured by the legal expenses to defend against an appeal, and there are several examples in midwestern states of litigation costs nearing or exceeding $1 million. These potentially long and costly legal battles can be a significant deterrent for local governments to defend against a dark store appeal. Additional risks to local governments facing such appeals include sizable settlements that could require local governments to repay previously collected taxes to a contested store; the potential for a single store to routinely contest its valuation, resulting in consecutive annual appeals; or a single local government being subjected to simultaneous appeals from different stores.

Tax Burden Shifts And Revenues Losses Are Already Occurring

The laws governing local property tax levies can influence how successful dark store appeals affect property tax collections and tax burdens in a particular state. For instance, in states subject to levy limits, including Wisconsin and Maine, a dark store appeal can result in a tax shift to residential properties from commercial. For example, an analysis conducted by the League of Wisconsin Municipalities found that in municipalities studied, residential tax bills increased by 8% or greater on average after successful dark store appeals. Dark store appeals in states subject to assessment limits cause a similar tax shift, which could not only create political resistance to future tax increases but also cause a loss of revenue once the residential properties reach their assessment limit. In states subject to property tax rate limits, including Indiana and Michigan, successful dark store appeals can result in lost revenue for local governments because tax levies typically only increase if property values rise or if new property is added to the tax roll.

The magnitude of the loss in assessed value and the corresponding budget impact on the affected taxing jurisdictions can vary significantly from one appeal to the next. Some municipalities have reported losses in the tens of thousands of dollars in annual tax revenue from a single appeal, while others have seen losses into the area of $100,000 or more. Local governments most at risk include those with smaller tax bases, a heavier retail concentration, or those with weaker budgetary reserves and liquidity. Local governments with lower cash reserves might be less able to handle a large settlement payment and have fewer resources with which to maintain the same level of service provision while making budget adjustments to accommodate a loss in revenue. As the tax base scales up to levels typical of counties and midsize to large cities, there is generally less dependence on big box retail stores for a significant share of tax dollars; these larger entities' revenue streams are less at risk.

Some Court Rulings And Legislation Could Challenge Dark Store Appeals

Although dark store tactics are now being used in more states (not just the Midwest), there are recent instances of court rulings that have favored local governments following dark store appeals. In several Midwestern states where these tactics first gained momentum, legal decisions could set precedents in those states for dark store appeal case appeals. For example, at the end of 2020, the Indiana Tax Court affirmed a 2018 decision made by the Indiana Board of Tax Review in favor of Boone County against a property reassessment appeal brought by superstore chain Meijer Inc. While the Indiana Board of Tax Review has frequently upheld the use of a comparable sales approach, one key differentiating aspect of the 2018 decision was that the Indiana Board of Tax Review determined there were no comparable properties for the Meijer store and the board required a disclosure of the store's cost to build to use in determining the assessment value. Although the Boone County case is unique and there are aspects of it that it will not directly translate into other dark store appeals cases in the state, the Indiana Tax Court's decision has the potential to influence a statewide precedent for some future dark store appeals.

The table below summarizes some of the key legislative and legal developments that are either ongoing or have recently taken place. A theme emerging is that the widespread use of dark store appeals has seldom gone unchallenged and has spawned calls for legislative reform in many states. Yet these legislative fixes have sometimes stalled amid opposition or faced significant setbacks from subsequent legislation or court decisions. The legislative outlook appears mixed because several states have proposed legislation that has yet to be codified, and some final statutes have been watered down from the originally proposed bills.

Furthermore, the spread of dark store appeals within certain states has not been uniform and it is unclear if the earlier and more significant examples in the Midwest will be replicated elsewhere. The success of many dark store tactics for big box stores in Michigan, Wisconsin, and Indiana has depended in part on favorable court rulings. This, coupled with the lack of a firm legislative response, could pave the way for wider use of dark store tactics in these and other states but, as we saw in the Boone County case, the rulings might not always be in favor of big box stores.

Recent Legislative And Legal Developments


In its original form, Senate Bill 182 (introduced in the Alabama 2018 legislative session) would have prohibited the use of comparable sales data from vacant or deed-restricted properties in commercial or industrial tax appeals. The amended version that was signed into law as Act No. 2018-265, however, requires only that the appealing party disclose whether the comparable property used as evidence in an appeal was unoccupied or deed-restricted at the time of sale.


Indiana Senate Bill 307 was introduced in January 2021 and proposes the use of the cost approach to value occupied commercial properties for the first 10 years of occupancy after construction. The bill was referred to the State Senate Tax and Fiscal Policy Committee. Previously, the state Legislature passed a law in 2015 that required the use of the cost approach for similar properties to those outlined in Senate Bill 307, but this legislation was repealed in 2016. The state supreme court has not yet ruled directly on dark store appeals, having previously denied review of a lower court ruling in favor of a Kohl’s dark store appeal in Howard County Assessor v. Kohl’s.


Johnson County, part of the Kansas City metro area, was the epicenter of 10 Walmart dark store appeals in early 2019, following a 2016 countywide reassessment of big box stores using an income-based approach. The Kansas Board of Tax Appeals subsequently sided with Walmart, accepting dark store arguments and finding that the county had over-assessed its Walmart properties by $60 million over two years. In 2020, the Legislative Committee on Taxation considered House Bill 2498, which would prohibit using a hypothetical leased fee or the dark store theory as a basis for determining a property's fair market value. The bill subsequently died in committee.

North Carolina

In 2016, the North Carolina Property Tax Commission ruled in favor of Forsyth County against a property reassessment appeal brought by Lowes Cos. Inc. The commission concluded that the county’s use of the cost approach in valuing the property was appropriate. In 2018, the North Carolina Court of Appeals overturned the 2016 decision the commission made and highlighted that consideration of the income and comparable sales methods of valuation should have been given.


Legislative Document 2045 proposed the establishment of a valuation method for large retail facilities that would rely primarily on a property’s highest and best use. If successful, the bill could have limited the effectiveness of dark store appeals in Maine but the bill died in November 2020.


In recent years, several bills have been proposed that would minimize the use of the comparable sales valuation method used in dark store appeals; however, the proposals did not move forward. The most recent proposal was House Bill 4025 in January 2019, which was blocked later that year.


In 2019, the Minnesota Tax Court ruled in favor of Hennepin County in the case of Lowe’s Home Centers, LLC v County of Hennepin. The case involved a Lowe’s store in the city of Plymouth that claimed that the Hennepin County Assessor’s Office had overvalued the store at $11.8 million, which was $6.5 million higher than the company’s claimed valuation of $5.3 million. The Minnesota Tax Court ruled that in determining the property’s value, it gave 75% to the cost approach and 25% to the estimated sale of a vacant building that Lowe’s wanted. As a result, the court reduced the value on Lowe’s Plymouth property to $10.5 million, only $1.3 million lower than the city’s original valuation. While this determination was expected to have statewide ramifications, Walmart has since furthered the dark store argument on the grounds that its rights of equal protection and uniformity granted under the 14th Amendment of the U.S. Constitution have been violated, thereby moving appeals out of the Minnesota Tax Court. Judges in Martin County and Winona County district courts ruled against Walmart's constitutionality argument saying that Minnesota's Chapter 278 is the exclusive remedy for taxpayers to address unequal assessments, over valuations and other claims. In an unpublished opinion on March 1, 2021, the State of Minnesota Court of Appeals affirmed the district courts’ decision to dismiss Walmart's complaint.


In 2017, the Legislative House Ways and Means Committee considered House Bill 27 relating to the consideration of the use of property or a comparable property in certain appeals of an appraisal review. Under the bill, a property would be required to have the same highest and best use as the subject property to be considered a comparable property, thereby restricting the use of dark store comparable properties. This bill was placed on the general state calendar but has not been revisited by the Texas Legislature. Also, in 2017, the state comptroller published an opinion on the dark store tactic in the February 2017 issue of Fiscal Notes. The comptroller estimated local governments across the state could lose $2.6 billion annually within five years if the dark store strategy were to spread statewide.


In his executive budget for the 2021-2023 biennium, the Wisconsin governor recommended implementing reforms to assessment practices to require that real property be assessed at its highest and best use and include leases, rights, and privileges pertaining to the property. Under the governor's proposal, "dark properties" are not considered comparable to assessed occupied properties. In the past, the state Legislature took up similar legislation through Senate Bill 130, a bill that would eliminate the use of deed-restricted, vacant, and unoccupied properties in sales comparisons. However, the bill idled and has yet to be revisited after being introduced on a bipartisan basis following opposition from the state chamber of commerce.

Related Research

'Dark Store' Tactic By Big-Box Retailers Could Pressure U.S. Municipal Budgets And Credit Quality, Jan. 29, 2018

This report does not constitute a rating action.

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