Education

Walgreens loses tax lawsuit that could have cost Kentucky schools millions

Walgreens contested the property tax bill on its Nicholasville Road property, which became a test case for the state. A Fayette circuit judge ruled that the methodology used to value the property was correct, and the Kentucky Court of Appeals and Supreme Court upheld that ruling.
Walgreens contested the property tax bill on its Nicholasville Road property, which became a test case for the state. A Fayette circuit judge ruled that the methodology used to value the property was correct, and the Kentucky Court of Appeals and Supreme Court upheld that ruling. Herald-Leader file photo

The Kentucky Supreme Court declined this month to hear an appeal brought by Walgreens Co., presumably ending a longstanding legal battle between the pharmacy chain and Fayette County officials that threatened to strip hundreds of millions of dollars from Kentucky’s school districts.

The court’s March 15 decision to deny Walgreens’ motion for review will benefit school districts statewide, Fayette County Property Valuation Administrator David O’Neill said.

Walgreens wanted Kentucky’s high court to review a 2016 Court of Appeals opinion that O’Neill had properly assessed the value of the Walgreens pharmacy at 2290 Nicholasville Road. The appeals court had upheld a 2015 decision by then-Fayette Circuit Judge Tom Clark.

If O’Neill had lost the case, the potential change in how PVAs assess commercial property could have cost Kentucky’s 173 public school districts hundreds of millions of dollars.

“While I was confident that our methodology was sound and correct, it still had far-reaching implications across the state and to all of our school districts,” O’Neill said. “It’s a tremendous relief to finally have this settled.”

In its lawsuit, Walgreens contended that Kentucky PVAs use the wrong methodology to determine the value of its stores, resulting in inflated values and unfairly high tax bills. Statewide, Walgreens had appealed the valuation on most of its approximately 94 stores to the state board of tax appeals, O’Neill said.

Walgreens’ store on Nicholasville Road is worth $5 million, according to O’Neill, but the company had contested its property tax bill for five previous years, paying the taxes as though the store was worth $3.4 million.

That, combined with similar appeals for six other Walgreens in Fayette County and multiple other appeals by other businesses, amounted to a $660,000 loss for Fayette County Public Schools. The companies must now pay the taxes they withheld, plus interest, O’Neill said.

Overall, a variety of Lexington agencies that rely on property taxes for funding, including the public library system and Lextran, could get about $1 million in new tax revenue as a result of the final ruling, said O’Neill and Richard Vimont, a civil attorney for the Fayette County Attorney’s office.

O’Neill said his office and Fayette County Attorney Larry Roberts’ office “stepped up to take this case on behalf of the entire state.”

“It’s far-more reaching than Walgreens,” O’Neill said. “It’s any number of national chains.”

The 2015 ruling in Fayette Circuit Court said the method O’Neill used to value the property “was not arbitrary or capricious, nor was it clearly erroneous.”

The appeals court concurred, saying, “While Walgreens demonstrated an alternative method for assessing the property, it failed to present convincing evidence that the PVA’s assessment overvalued the property.”

There are three accepted practices for determining a property’s value:

▪  For a residential property, PVAs usually base their estimates on comparable sales in a given neighborhood.

▪  For a new commercial property, PVAs sometimes look at the cost of construction.

▪  For an existing commercial property, PVAs usually determine a value by calculating how much income it can generate. In other words, what could a real estate holding company collect by renting the property over time to a corporation, such as Walgreens?

Walgreens contended that its stores should be assessed based on the sales price of comparable properties, not its cost to lease the stores.

Phil Caruso, a spokesman for Walgreens, declined to comment on the Supreme Court’s decision.

Caruso has previously defended the company’s appeal, saying Walgreens was behaving “like any taxpayer who believes their real estate assessment is excessive.”

Valarie Honeycutt Spears: 859-231-3409, @vhspears

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