Lynne Hermansen
The Kansas Supreme Court ruled Friday in an unanimous decision overturning lower court decisions and rejected the Kansas Board of Tax Appeals 2021 findings that Johnson County had overtaxed Walmart’s 11 properties and Sam’s Club’s two properties by tens of millions of dollars.
They dealt a blow known as dark store theory-an idea used by big box retailers to reduce their property taxes. The decision reversed the previous ruling that favored Walmart’s argument in 2016 and 2017 its  properties in Johnson County were overtaxed by tens of millions.
The dark store theory states big box stores should be valued as if they were an empty building not an operating business.
The appeals courts fed the “dark store theory” a criticism at retailers that believed their property should be appraised as if their property was vacant and seperate from the business activity it generates through lucrative lease agreements associated with the businesses. The dark store theory argues property owned by large retailers should be valued as vacant buildings ready to be sold. Attorneys for the retailers compare it to the sale of a home where a buyer does not consider the financial well-being of the seller to decide the value of the property.
The court said the Board of Tax Appeals had disregarded evidence from Johnson County on how to value Walmart’s properties.
The cases were sent back to the Board of Tax Appeals to reconsider and examine the county’s evidence. The board could rule again in Walmart’s favor.
“Though BOTA may reach the same result in remand that decision must be based on its own determinations of the facts and witness credibility,” Justice Dan Biles said.
Justice Biles said the highly contested issue boiled down to deciding whether appraisals relying build-to-suit lease data was admissible in Kansas. The Board of Tax Appeals relied on a 2012 State Court of Appeals decision in the Prieb Properties case and determined rental rates from commercial leases weren’t reflective of market conditions.
“We hold Prieb’s rationale invades BOTA’s long-standing province as the fact finder in the statutory process for appraising real property at its fair market value,” he said. “By following Prieb BOTA imposed an exclusionary rule on the county’s evidence rather than simply considering its weight and credibility.”
The case drew the national attention of the U.S. Chamber of Commerce, the world’s largest business federation with more than 300,00 members.
The U.S. Chamber filed an amicus brief with the Supreme Court siding with the retailers. They argued state legal precedent was on their side.
The brief said a small number of appraisers have unilaterally attempted to increase tax burdens on retailers like Walmart in contravention of the Kansas Staye Legislature’s statutory directives and at the expense of fairness.
“Walmart and similarly situated retailers already pay the amount of property taxes the Kansas Legislature has determined they should pay and indeed they pay more than residential and agriculture property owners,” the chamber said. “Appraisers must follow the law. If they wish to change it the proper venues is the Kansas Legislature not their own unilateral efforts hoping to be upheld by Kansas Courts.”
The decade of legal precedent in question is from a 2012 appraisal case involving a Topeka Best Buy store known as Prieb with the phrase “fee simple estate” and how it applies to property appraisals.
Big-box retailers’ lawyers said the phrase means the properties should be appraised without consideration of anything else including the lease.
They have said the law is on their side because “fee simple” was upheld by the Kansas Court of Appeals in the 2012 case.
The U.S. Chamber of Commerce said the Kansas Court of Appeals have consistently applied the Prieb case over the years.
Johnson County argued the court in the Prieb case stepped outside its authority by ruling on matters of generally accepted principles of real estate appraisal instead of limiting its ruling to matters of law.
“If these properties are required to be valued as if vacant taxing authorities will be forced to shift the tax burden from big box property owners to multi-tenant commercial and residential property owners,” Johnson County said in its court petition.
The Leavue of Kansas Municipalities and the Kansas Association of Counties filed friend-of-the-court briefs requesting the court to reverse the lower court ruling.
The League said the 2012 Topeka Prieb case violates the Kansas Constitution and the equal protection clause of the U.S. Constitution.
“The Prieb decision and its mandate violate the Kansas Constitution and conflicts with well-established Kansas precedent,” they said. “They judicially created ‘big box’ appraisal methodology incorporates, reflects and legislates a favored appraisal practice to be used to value big box properties such as Walmart and Sam’s Clubs in Kansas to the exclusion of all other commercial  real estate.”
They argued requiring big-box stores be appraised as if they were vacant the Prieb case creates a subcategory of commercial property that is not covered by the state constitution and violates the U.S. Constitution.
“The Prieb court’s mandate that all such big box properties be valued as vacant funds no support in any Kansas statute or in any guide published by the Kansas Department of Revenue,” they said. “The evidence and testimony of expert witnesses in this case demonstrate that the Prieb mandate requires that Kansas counties appraise these big box stores at far less than the market value of these properties.”
They said no other class of commercial property in the state is treated in this manner.
The Kansas Supreme Court remanded the case to Board of Tax Appeals instructing the board to evaluate the county’s evidence without Prieb’s constraints.
“Though BOTA may reach the same result on remand that decision must be based on its own determinations of the facts and witness credibility,” Justice Biles said.
Cities and counties in Kansas feared a ruling in Walmart’s favor would open the floodgates for other big box stores to recoup millions of dollars in property taxes. The ruling could have forced cities and counties to raise property taxes on their residents to cover the revenue loss.
John Goodyear, League of Kansas Municipalities, said a ruling favoring Walmart would allow other retailers to push for similar property tax reductions.
“The fear is that this will spread to any community where there is a single-tenant big box retail store,” he said.
The Kansas Board of Tax Appeals had agreed to Walmart’s argument at the time and said the 11 Johnson County stores that also included Sam’s Clubs were overtaxed by approximately $63 million in 2016 and $60 million in 2017.
Johnson County appealed the decision.
Ryan Carpenter, a county attorney, said the board had misapplied the law and the dark store theory does not tax big retailers on their fair market value as other properties are taxed.
City and county officials said they feared this would create huge drops in tax revenues with other retailers like Target, CVS, Walgreens and Bass Pro as they had won similar tax appeals cases in Johnson County in the past.
Becky Fast, Johnson County Commissioner, said in 2019 the decision could be like a tsunami.
“It’s just one after another,” she said.