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High court backs Walgreens in battle with Madison over property taxes

Kristin Czubkowski and Steven Elbow  —  7/08/2008 12:19 pm

The city of Madison, the school district and other governmental tax districts will have to pay back hundreds of thousands of dollars in property taxes to two Walgreens stores, the state Supreme Court said Tuesday.

Walgreen Co. sued the city in 2004 for $150,000 that the company said it was overcharged because the city based its property tax assessment on the lease amount Walgreens paid on its stores in 2003 and 2004. Dane County Circuit Court and the state Appeals Court both sided with the city. But Tuesday's Supreme Court opinion rules that the lower courts erred by not following the tenets of the Wisconsin Property Assessment Manual.

Madison city assessor Michael Kurth said the city used previous Supreme Court opinions in deciding to assess the Walgreens stores at 2909 East Washington Ave. and 3710 East Washington Ave. based on rent income value rather than the fair market value of the lease.

"Obviously we didn't get it right, according to their opinion," Kurth said.

Robert Hill, one of the lawyers for Walgreens, said the city found a weakness in Walgreens' "profitable business plan" that prompted it to charge the higher property tax.

Walgreens generally goes out and gets developers to buy land or properties and prepare stores for it, then pays a higher rent to pay back those extra expenditures. If Walgreens owned its stores, this wouldn't be an issue, Hill said, because a Walgreens store can be built for $2 million, but the two on East Washington Avenue were getting assessed at closer to $6 million because of the higher rent paid to developers. Walgreens prefers not to own its stores, he said, because it doesn't want to have to manage $40 billion to $50 billion worth of property.

"They are in the business of selling lipstick and toothpaste and pharmaceuticals. They're not in the business of owning real estate," he said.

Kurth said the decision probably won't have a wide-ranging impact for the city.

"I don't see where we have too many, if any, other properties with similar circumstances," he said.

But he added that the award amount is nothing to sneeze at.

"It's money of concern to us," he said.

Hill added, however, that Kurth's model has been picked up at close to 40 stores statewide, and that lawyers will be going back to those stores with this decision. The case, which he called a "clarion call," could also influence cases nationwide in places like Florida and Ohio where municipalities are targeting "finance instruments" like Walgreens' business model to charge higher property taxes.

"This decision now I think will be used not only by Walgreens, but other retailers because, like I said, there are all kinds of states that were thinking about doing the same thing because everyone is so hungry for revenue, you know?" Hill said.

The case has been sent back to Dane County Circuit Court, where the amount the city and other taxing jurisdictions -- including the school district, the county and the technical school system -- owe will be determined. Hill said the city will likely have to reimburse the tax difference from 2003 through 2008. Property taxes on these two stores totaled nearly $230,000 in 2007.

The city will likely pay back the full amount, then get reimbursed for the portions the other jurisdictions overpaid, Kurth said. The city is responsible for paying any interest on the amount.

The Supreme Court decision, written by Justice Louis Butler, was unanimous. But Chief Justice Shirley Abrahamson wrote a separate concurring decision, saying the court was not bound to makes its decision in accordance with the rules in the Property Assessment Manual.

Kristin Czubkowski and Steven Elbow  —  7/08/2008 12:19 pm