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Statewide Wave of Property Tax Challenges Hits Oshkosh

BY MILES MAGUIRE

Statewide Wave of Property Tax Challenges Hits Oshkosh.

One day in late July, Madison attorney Don M. Millis filed a pair of lawsuits against the city of Oshkosh on behalf of two well-known retail chains, demanding almost $200,000 in property tax refunds, interest and attorney’s fees.

The suits are part of a wave of property tax challenges that are sweeping across the state, threatening a fundamental shift in the local tax burden, calling into question pro-development municipal policies and setting up a clash between commercial stores and their customers.

The Oshkosh suits seek lower tax assessments for the city’s two Walgreens locations and its three Kwik Trips.

While every property owner has the right to challenge a real estate valuation and while companies have long sought to minimize their taxes, city officials believe that the current round of refund requests is particularly worrisome.

Anyone reading news stories from around the state would know why. In May the Journal Sentinel reported that the city of Milwaukee had agreed to refund almost $4 million to Walgreens. Two months later the Journal Times in Racine reported on tax lawsuits filed by Target and Sears. A few weeks later the Janesville Gazette reported on more than $400,000 in tax challenges from companies like Blain’s Farm and Fleet and Menards.

The number of legal challenges around the state is difficult to quantify, but “it’s fair to say that’s it’s a fairly organized effort,” said Jerry Deschane, executive director of the League of Wisconsin Municipalities.

City Manager Mark Rohloff warned the Common Council earlier this year that if Oshkosh loses these cases the result would put a disproportionate part of the tax burden on homeowners.

Rohloff told the council that the tax challenges are the result of a 2008 case that Walgreens successfully argued against the city of Madison before the Wisconsin Supreme Court. In its ruling the court gave its blessing to a property valuation approach that gives a boost to retailers that avoid state taxes by using subsidiaries to own their stores.

In general terms the tax avoidance technique works like this. A retailer builds a store and turns it over to a subsidiary that uses a corporate structure called a real estate trust. The retail arm of the company agrees to pay the real estate arm an above market rent, which has two effects. This approach first lowers taxable income for the retail arm, since rent is deductible, and then it allows the rent payments to flow back to the corporate parent on favorable tax terms.

Assessors around the state have focused on the actual rent payments to set the value of retail stores. But the retailers convinced the Supreme Court that state law requires the use of market rates, rather than rates that may be inflated for one reason or another. Retailers say their above market rents reflect special design features that they have installed that would not have much value to another tenant.

It’s not entirely clear why so many tax lawsuits are arising now, years after the Supreme Court case. But Oshkosh Assessor Steven Schwoerer said that businesses will often wait for several years’ worth of tax challenges to build up to justify the cost of filing suit. In the meantime there is often much behind-the-scenes wrangling over property values, which can result in much lower assessments.

In the wake of the Supreme Court case, the state changed its guidelines for property valuations, which retailers are also challenging as unfair retaliation.

Over the years most of the other major retailers in Oshkosh, including Lowe’s, Menards, ShopKo and Fleet Farm, have protested their assessments, but they have done so administratively, starting with the city’s Board of Review, rather than by going to court. Retailers are not the only kinds of companies that have challenged their assessments in recent years, but most cases are settled without court action.

Defending the lawsuits can be expensive. Oshkosh has insurance to cover legal costs up to $50,000 per dispute, but City Attorney Lynn Lorenson said the city has already gone over that amount on a previous Walgreens lawsuit, which is now before the Court of Appeals. As of mid-August, the city had spent $25,812 in that case, which was appealed after Winnebago County Judge Daniel J. Bissett rejected the city’s assessment.

The news that retail operators are fighting the city over taxes does not sit well with some members of the council, which has frequently adjusted land use rules to accommodate the development of new stores. Councilman Thomas R. Pech Jr. warned that businesses that file suit may be “biting the hand that feeds them.”

For decades the private sector has argued, usually successfully, that it deserves special treatment because of its ability to create jobs and build the local tax base. But it will be harder in the future for the city to justify development favors for companies that may turn around and fight their assessments.

Retailers also need to worry about how their tax strategies will affect their customers. If retailers get all the breaks they are asking for (and it’s fair to assume that if Kwik Trip and Walgreens succeed, others will follow), the budget implications could be severe, Oshkosh officials say. With less money coming into city coffers, residents would face either a reduction in city services or an increase in tax payments on their own properties to make up the difference.

Since local property owners also make up the customer base for local retail stores, the move to shift the tax burden could come back to hurt these companies. The risks of pushing too hard to minimize their payments to support public projects was recognized in August when Walgreens announced that it would not adopt a strategy that would have sharply reduced its federal income tax liability.

The company said it was concerned about the public relations fallout as well as the effect on at least one of its customers, the federal government. In explaining that it would not use the so-called “inversion” technique, Walgreens said it “was was mindful of the ongoing public reaction to a potential inversion and Walgreens’ unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs.”

It remains to be seen whether Walgreens or other retailers will rethink their approach in Oshkosh based on the twin dangers of bad publicity and the adverse effect on their local customers.

Walgreens, Kwik Trip and their attorney were contacted to discuss the lawsuits, but they did not offer any comment. ν

Miles Maguire be reached at miles.maguire@yahoo.com.

 

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