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“Big Box” Tax Appeals Have Big Impact on School District Finances

On April 22, 2014, the Michigan Court of Appeals issued an opinion affirming the Michigan Tax Tribu­nal’s decisions in Lowe’s Home Centers Inc v Township of Marquette, Docket No. 314111 (April 22, 2014) and Home Depot USA Inc v Township of Breitung, Docket No. 314301 (April 22, 2014). In both cases, the Tax Tribunal adopted the so-called “dark store” methodology of valuing “big box” stores for property tax assessments. This approach values a big box store property as if it is functionally obsolete, vacant, and available for lease or purchase -- even if it is actually occupied and being used. As a result, the Tax Tribunal’s rulings slashed Lowe’s and Home Depot’s state equalized values and taxable values by more than half.

The Court of Appeals’ endorsement of the Tax Tribunal’s dark and vacant store methodology opens the door for additional tax appeals by big box stores. Municipal officials are concerned that other smaller commercial property owners may argue this approach to further reduce their property tax liabilities, which would only exacerbate the sharp decline in revenues. These decisions may persuade the municipalities de­fending property tax appeals to settle for much lower property values rather than incur the costs of defense.

The court’s decision is important to school dis­tricts because of the significant impact Tax Tribunal decisions can have on school finances, as well as a district’s tax base and plans for future bonding. While municipalities are the first line of defense in Tax Tribunal cases, school districts are not without op­tions to address pending Tax Tribunal cases and judgments.

Options While A Tax Tribunal Case Is Pending

A taxpayer must serve the initial tax appeal peti­tion on each local taxing entity, including the secretary of the board of education of the school district in which the property is located. That is the only time the taxpayer or the municipality is required to notify the local school district about pending tax appeals.

Because school districts are not directly involved in the Tax Tribunal process, it is important that school officials implement a system to monitor the status of pending tax appeals. School officials should take the necessary steps to ensure they are aware of all pending appeals and the status of those appeals. Municipal officials should be contacted periodically to monitor the status of pending large tax appeals.

Although the local municipality is responsible for defending an appeal, school officials should consider intervening when a significant refund or valuation change is at stake. Except for residential and small claims appeals, Michigan law provides that a school district may file a motion with the Tax Tribunal to intervene in an appeal. School districts also may con­tribute funds to defend a tax appeal in certain situations.

Getting involved early in the process may avoid later difficulties and put the district in a better posi­tion to negotiate a refund. Too often, school districts lose their bargaining leverage by getting involved only after a judgment has been entered or after the municipality has settled the case without input from the district.

Options For Addressing A Tax Tribunal Judgment

If a final judgment or settlement has been en­tered lowering the taxable value of a property, the local taxing units, including school districts, will be required to refund taxes to the taxpayer. Under the State School Aid Act, the State of Michigan is re­quired to “hold harmless” (i.e., reimburse) “in-for­mula” school districts for any operating millage reve­nues they are obligated to refund as a result of a judgment or settlement.

However, out-of-formula districts and ISDs are not held harmless for operating taxes. Further, nei­ther in-formula nor out-of-formula districts are held harmless for levies of a debt or sinking fund millage or interest accrued on a Tax Tribunal’s judgment.

School officials have options available to them to lessen the burden of paying a tax refund. For exam­ple, a school district may have the right to spread a tax appeal judgment on the district’s tax rolls. Also, school officials can negotiate refunds. School districts are often in a better position to negotiate refunds than the municipality—they are seen as an “innocent” party because they did not actually over-assess the property. School districts may use their bargaining leverage to negotiate a repayment plan, including a waiver of interest payments. School officials should, however, be sure to negotiate directly with the taxpayer.

Following the Michigan Court of Appeals’ “big box” ruling, we anticipate a dramatic increase in commercial property tax appeals. School officials are cautioned to implement a system for monitoring pending tax appeals and their potential impact on school finances. 

Thrun Law Firm’s Municipal Practice Group rep­resents many municipalities in the Tax Tribunal de­fending against large commercial property tax ap­peals. If your district has a large commercial appeal, contact a Thrun municipal attorney with any ques­tions how the tax appeal may affect your district.