March 16, 2015
Drugstores take on the (property) taxman
Retailers pay property taxes that generate a sizable amount of revenue for municipalities. Drugstores such as Walgreens and CVS have been arguing a tax strategy in courts around the country that, when successful, dramatically lowers the property taxes they pay and municipalities aren’t happy about it.
According to a Bloomberg article, the drugstores’ argument hinges around the values of the long-term net leases they sign when renting a location. In a net lease, the renter covers property taxes and other expenses, and the retailer pays a premium in excess of building costs. The net leases are then traded among investors who own property. The taxes retailers pay are assessed on the basis of the value of these leases, rather than the value of the property itself. Retailers — especially drugstores, due to their expensive locations and number of leases — have been taking tax assessors to court to get their property taxes assessed at the latter, lower value.
Cases of this nature can be found nationwide, sometimes accompanied by public outrage when made known. When chains halve their tax burdens, residents cover the shortfall.
In February 2015, the Lexington Herald-Leader reported on a recent high-profile attempt on the part of Walgreens to lower its tax bill. A Walgreens location in Fayette County was valuated at $5 million, according the article, but the chain argued it they should pay taxes on a property valuation of $3.4 million.
The Herald reported that, according to Fayette County property valuation administrator David O’Neill, Walgreens was making similar appeals for six other locations in the area, which if won would pull $220,224 from the county school district. Walgreens has appealed valuations on 20 of its 94 stores in Kentucky, according to the piece.
An article in the Milwaukee Journal Sentinel reported that between 2008 and 2014, Walgreens filed more claims against the City of Milwaukee for excessive taxation than any other property owner, filing claims on all 18 of its stores every year.
The article indicated the policy amounts to bullying smaller municipalities that don’t have the bandwidth to handle the lawsuits.
Some see a slippery slope, beginning with drugstores and ending with municipalities taking a big tax hit as retailers of all types argue overvaluation.
"More companies are bringing them," said Amie Trupke, a Madison-based attorney who represents municipalities in assessment cases in the Sentinel article. "Walgreens was probably the pioneer. But now we have Sears, Target, Menards, Kohl’s, Fleet Farm, Farm & Fleet and the fast-food chains bringing challenges."
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Discussion Questions
Do you think property taxes should be assessed at the value of the real estate a retailer occupies or the value of its lease? How do you see this conflict between retailers and municipalities playing out nationwide?
Poll
Follow the money and the deep pockets armed with savvy real estate lawyers will win, which will put the burden on the rest of the taxpayers who live there to pay the difference. The big get bigger, and the general public always get the short end of the deal. Walmart is famous for tax breaks, with free roads and intersections put near their stores at our expense, so Walgreens is exercising their power to lower their taxes, and I’m sure the local school systems will not look favorably on this. Who’s next to jump in?
The lease or the real estate? Probably neither. The property taxes should be whatever the municipality and retailer can agree to, even if decided by the court. Just like the price of anything, its a negotiation between two parties. If a retailer wins in court, the retailer is in the right. A retailer has an obligation to its investors and customers to help keep down overhead. Tying property tax to an actual real estate value or a lease leave open plenty of loopholes. During economic downturns, property values can plummet. Or just the opposite in good times and the retailer is sitting there with a cheap lease. Whatever the economic conditions, retailers will always be challenging their assessments.
This is a legal argument that will eventually be resolved in court. From my view, brick-and-mortar retailers are part of a local community and as such they hire locally and pay taxes locally in support of that community.
There needs to be a sense of fairness in the process for both the retailer and the community itself. What you don’t want is to have ambiguity in that process which favors one retailer over another or benefits one community over another.
How about if we don’t accept the status quo taxation models with their multiple loopholes and opt instead for a simplified, more democratic tax code?
It doesn’t really matter what valuation system you choose if—in the end—a sharp accountant can find a way to shift the tax burden somewhere else.
As to the conflict, most municipalities are recruiting businesses and offering them significant abatements anyway. Not sure I really get this story. What’s the alternative for municipal areas? Tax themselves out of the race for business development?
Sure nobody likes it when somebody figures out a way to game the system, but municipal officials are caught between a rock and a hard place. Toughen the tax laws and businesses will just ask for deeper abatements.
In California the system is based on market value at the time of the sale. And in the case of a Walgreens sold to an investor on a NNN lease, the basis will be the discounted cash flow based on the lease value. If a retailers seeks to pay a higher lease rate to capitalize additional expenses in the lease it shouldn’t matter, the leased value should rule.
Why does it always seem that the smallest cog in the engine, us taxpayers, seem to shoulder the brunt of the burden? Tony said it so well—the deeper the pocket the stronger the legal battle these drug retailers can/will fight. And it is at the taxpayers’ expense. Enough of this already, don’t you think?
Of course corporations should be expected to arrange their business affairs to minimize their tax obligations. (Anybody remember Judge Learned Hand?)
Now we learn some retailers have noticed that the values of the underlying properties have declined relative to the values of their leases. If real estate values were rising fast, those same leases would be a protection against tax bill increases.
Property-value-versus-lease-value is a technical-legal argument. It’s up to the courts to determine whether it holds water under present laws. It up to the states to consider revising those laws to close the loophole, if they see fit.
I for one, don’t see a major risk in ticking-off retailers by hardening this rule. Once stores are planted on a (level) playing field, they won’t be going anywhere soon.
If tax on the value of the property is the real rate, then that should be the tax rate. However, municipalities have often discounted the tax rate to lure businesses. This will be a long battle and may well be decided municipality by municipality. Tax attorneys are the real benefactors.
One can see the value of what the drugstores are arguing but it’s easy to see how this can spiral. Just because a drug store gets a tax break doesn’t mean the municipality gets an expense break. So that “neighborhood” store isn’t exactly doing wonders for the neighborhood, is it? I get the capitalist view of it. But: big corporate gets tax break while independents and homeowners don’t. Not exactly things to brag about to your mother. Tax works when it’s a level playing field.
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Follow the money and the deep pockets armed with savvy real estate lawyers will win, which will put the burden on the rest of the taxpayers who live there to pay the difference. The big get bigger, and the general public always get the short end of the deal. Walmart is famous for tax breaks, with free roads and intersections put near their stores at our expense, so Walgreens is exercising their power to lower their taxes, and I’m sure the local school systems will not look favorably on this. Who’s next to jump in?
The lease or the real estate? Probably neither. The property taxes should be whatever the municipality and retailer can agree to, even if decided by the court. Just like the price of anything, its a negotiation between two parties. If a retailer wins in court, the retailer is in the right. A retailer has an obligation to its investors and customers to help keep down overhead. Tying property tax to an actual real estate value or a lease leave open plenty of loopholes. During economic downturns, property values can plummet. Or just the opposite in good times and the retailer is sitting there with a cheap lease. Whatever the economic conditions, retailers will always be challenging their assessments.
This is a legal argument that will eventually be resolved in court. From my view, brick-and-mortar retailers are part of a local community and as such they hire locally and pay taxes locally in support of that community.
There needs to be a sense of fairness in the process for both the retailer and the community itself. What you don’t want is to have ambiguity in that process which favors one retailer over another or benefits one community over another.
How about if we don’t accept the status quo taxation models with their multiple loopholes and opt instead for a simplified, more democratic tax code?
It doesn’t really matter what valuation system you choose if—in the end—a sharp accountant can find a way to shift the tax burden somewhere else.
As to the conflict, most municipalities are recruiting businesses and offering them significant abatements anyway. Not sure I really get this story. What’s the alternative for municipal areas? Tax themselves out of the race for business development?
Sure nobody likes it when somebody figures out a way to game the system, but municipal officials are caught between a rock and a hard place. Toughen the tax laws and businesses will just ask for deeper abatements.
In California the system is based on market value at the time of the sale. And in the case of a Walgreens sold to an investor on a NNN lease, the basis will be the discounted cash flow based on the lease value. If a retailers seeks to pay a higher lease rate to capitalize additional expenses in the lease it shouldn’t matter, the leased value should rule.
Why does it always seem that the smallest cog in the engine, us taxpayers, seem to shoulder the brunt of the burden? Tony said it so well—the deeper the pocket the stronger the legal battle these drug retailers can/will fight. And it is at the taxpayers’ expense. Enough of this already, don’t you think?
Of course corporations should be expected to arrange their business affairs to minimize their tax obligations. (Anybody remember Judge Learned Hand?)
Now we learn some retailers have noticed that the values of the underlying properties have declined relative to the values of their leases. If real estate values were rising fast, those same leases would be a protection against tax bill increases.
Property-value-versus-lease-value is a technical-legal argument. It’s up to the courts to determine whether it holds water under present laws. It up to the states to consider revising those laws to close the loophole, if they see fit.
I for one, don’t see a major risk in ticking-off retailers by hardening this rule. Once stores are planted on a (level) playing field, they won’t be going anywhere soon.
If tax on the value of the property is the real rate, then that should be the tax rate. However, municipalities have often discounted the tax rate to lure businesses. This will be a long battle and may well be decided municipality by municipality. Tax attorneys are the real benefactors.
One can see the value of what the drugstores are arguing but it’s easy to see how this can spiral. Just because a drug store gets a tax break doesn’t mean the municipality gets an expense break. So that “neighborhood” store isn’t exactly doing wonders for the neighborhood, is it? I get the capitalist view of it. But: big corporate gets tax break while independents and homeowners don’t. Not exactly things to brag about to your mother. Tax works when it’s a level playing field.