For the past few years, a majority of American states have comes across the Dark Store Strategy – a method that is used to weigh a commercial property’s value.

Many retailers have challenged the way their properties are valued by inspectors and the interesting part is that many have been successful in lowering the value of their properties. This, in turn, means that they pay lower property taxes as these are based on the property valuation.

Simply put, big-box retailers argue that all commercial properties, regardless of whether they are vacant or operational, should be evaluated in the same manner, i.e. as per their sale price. And they justify this claim by pointing out that even if they vacate their current property, it will not be easily sold out.

As a number of retail businesses in Michigan have managed to successfully use this argument in court, it is predicted that other states will be facing similar issues in the future. And since many local governments rely on property tax as a major source of funds – e.g. Carroll County earned 36% of its revenue from property taxes – this trend is of major concern.

Determining Property Tax RevenueProperty Taxes money

Two variables are used to determine property tax revenue:

  • Taxable property base
  • Property tax levy rate

Then there are three methods used to set the value of a particular property:

  1. Comparable sales approach
  2. Income approach
  3. Summation or cost approach

Once a valuation rate has been finalized, it is used alongside the tax levy rate to narrow down to the taxable amount owed by the owner.

What is concerning for many is the fact that the commercial sector includes many retail businesses that make a significant contribution towards the overall collected tax. Hence, if the dark store strategy becomes a permissible plea, it will benefit the retail store owner but at the same time, the state will end up with less money.

The fact is that the issue is extremely complex in nature and there are different laws from state to state; this is why lawmakers to date have not been able to come forth with a concrete law to put the dark store theory to rest.

Many states are now considering laws to protect local governments from the dark store strategy – their options include shifting the tax burden on citizens or equally unpopular choices such as downsizing city employees, reducing services, capital investment, etc.

All in all, if implemented in full swing, this strategy will reduce tax revenues that will in turn reduce the overall pace of community and economic development in the country.