Kmart takes locals to court over tax bills
A federal bankruptcy judge in Chicago recently threw out a lawsuit by Kmart accusing nearly 500 local property tax collectors of overcharging the retailer by millions of dollars. Nonetheless, the battle over the Troy, Mich.-based retailer’s 2001 and 2002 tax bills may have just begun, officials say.
In the suit, Kmart claimed assessment methods used by municipalities in 25 states are overly simplistic and cause inflated valuations of store fixtures, inventory and other taxable property. Kmart, which emerged from more than a year of bankruptcy protection in May 2003, asked the court to reduce the disputed bills by approximately $8.6 million.
In dismissing the complaint, Judge Jack Schmetterer said Kmart failed to show why hundreds of local claims should be lumped into one federal case. “How can the judge hear all of this in one case when every state has different procedures for refunds, different assessment-appeals boards, different tax laws?” says Martha Romero, a Los Angeles attorney who represents nine California counties named in the suit.
The judge left Kmart the option of re-filing individual claims or groups of highly similar claims in the Chicago court provided they meet certain stipulations laid out in the ruling. Meanwhile, Kmart is free to continue fighting the assessments locally. Kmart spokesman Jack Ferry says the retailer is reviewing its legal strategy. “What I can tell you is, as a company we pay $1.6 billion a year in taxes throughout the country,” Ferry says, declining further comment.
John Clark, tax collector for Palm Beach County, Fla., heads a coalition of 41 Florida counties fighting Kmart’s tax-reduction efforts and seeking payment of unpaid bills. In Florida, Kmart operated approximately 160 stores prior to closing 41 locations during bankruptcy. The retailer now owes the state’s local governments more than $3.5 million for unpaid 2002 taxes — as well more than $750,000 in interest on those payments — says Brian Hanlon, attorney for the Florida coalition. He is asking the federal bankruptcy court in Chicago to force Kmart to pay its Florida tax bills. “Either we get paid,” he says, “or the U.S. Supreme Court can tell us that statutory liens have no effect in bankruptcy court.”
Hanlon is an in-house attorney for Palm Beach County, but other cities and counties benefit neither from an in-house legal staff nor membership in a statewide coalition. Hanlon says Kmart likely will use the threat of re-filed claims to goad smaller governments into settling. For them, he explains, the cost of sending hired attorneys to litigate claims in Chicago may be too high.
About 150 cities and counties reportedly have settled with the retailer. The pressure to settle created by the federal suit angers some local officials. “It certainly gives the appearance of the abuse of the federal court system,” says Stephen Strawn, tax collector for Humboldt County, Calif. “There are clear channels of appeal at the local level, and it’s difficult to imagine there could be such wrongdoing — alleged wrongdoing — by tax collectors throughout the United States.”
In fact, Kmart already is involved in pending cases or negotiations at the state and local level. Kanawha County, W.Va. — a community not named in the federal suit — received a letter titled “Settlement Agreement” from Kmart in October asking the county to reduce Kmart’s unpaid 2001 and 2002 tax bills from $575,171 to $181,268, says Kent Carper, president of the Kanawha County Commission.
Carper is demanding Kmart pay up. “There’s no blue-light special in our county,” he says, “not on aisle three, aisle four or aisle five.”
Joel Groover is a freelance writer based in Atlanta.