A legal theory deployed nationally by big-box retailers to lower their property-tax bills is primed for a major test in Arkansas starting today, as Walmart Inc. seeks to cut its Pulaski County property-tax assessments by nearly half.

Barry Hyde, county judge of Pulaski County, blocked off two days to hear Walmart's appeal and moved it to a larger room -- to better accommodate unusual tax-assessment intrigue -- as the Bentonville corporation plans to argue what government assessors have derided as the "dark store theory."

The argument calls for retail buildings to be valued upon nationwide sales of similar stores, which are often empty big-box warehouses such as The Home Depot that have limited other uses.

Opponents of the tactic use the "dark store" moniker to highlight that companies want to be taxed as if their open stores are vacant. Supporters contend it's the fairest way to set market value.

At stake is about $4.5 million in revenue for Pulaski County agencies and school districts, but the case has broad implications.

Several observers said Walmart and the county are preparing as if the fight will go to the state Supreme Court, which would give the high court the chance to set precedent on a legal theory that has had mixed results elsewhere.

The answer could be worth more than $100 million in tax dollars across Arkansas, said Russell Hill, Washington County's tax assessor.

"If [one retailer is] successful, the other big-box stores ... are going to catch on and advance the same argument," said Rebecca Badgett, a local-government legal educator at the University of North Carolina's government school, who called the theory "contagious."

Badgett wrote last year about how the dark-store theory has fared. She noted that Walgreens opened the door for retailers to cut their tax payments in Wisconsin while Menard Inc.'s bid to break similar ground in Michigan failed. Other states, including Kansas, are in various stages of considering the question.

At least 21 states have seen "dark store" appeals, according to a September 2018 survey conducted by CityLab, a digital news website produced by Atlantic Media. Arkansas was not one of them.

"A lot of them settle out of court, so it's hard to understand how successful the big-box stores are," Badgett said.

Although other corporations have flirted with similar challenges here -- the poultry company Cargill withdrew an appeal on the day of a scheduled hearing before the Washington County chief executive in 2015-- Hill said he's aware of none that has seen it to conclusion.

"I think both parties are prepared to go to the state Supreme Court" with this case, Hill said.

Gov. Asa Hutchinson in an emailed statement said his office is "monitoring this case as needed."

"While there may be an adverse impact on local school district funding, this is a tax dispute that must be resolved through the court system," Hutchinson said.

Arkansas Education Secretary Johnny Key said in an emailed statement that the Elementary and Secondary Education Division is watching the case because "the outcome ... could impact school funding throughout the state."

Districts would be "fully on the hook for" any tax losses above a floor amount that the state guarantees each district, he said.

"Similar to the impact of the tax disputes by gas producers in the Fayetteville Shale areas, this could be a significant funding problem for districts," Key said.

Walmart and Pulaski County have dug in. After Walmart lost its first appeal before the county board of equalization, the company raised the stakes by cutting its valuation of 10 Pulaski County properties deeper than its first request, filings show. The county tapped a private law firm to beef up its defense.

"Obviously, Walmart is a very good community partner, in [Arkansas] especially," said Lindsey Bailey, legal counsel for the Association of Arkansas Counties. "So it's surprising to see them go after this theory in their home state, knowing the impact it can have on local governments and school districts."

In response, Walmart corporate senior director of communications Delia Garcia said by phone that the company is "very invested" in Arkansas. Walmart paid $300 million in state and local taxes and spent $18.9 billion with in-state suppliers in fiscal 2019, said Garcia, who did not immediately have a specific breakdown of property-tax payments.

"We believe in fair property taxation and, based on an independent analysis of comparable properties and current market conditions in Pulaski County, we believe the value of the property is lower than the assessed amount," Garcia said.

The 10 properties at the heart of the case include eight supercenters and two Sam's Club stores that Pulaski County assessed at a combined $145 million.

Walmart Inc. first petitioned to lower the assessments to $93.4 million total. It now seeks a $74.3 million valuation, which would be a 48.8% reduction.

Of the top-line worth set by government assessors, 20% is considered taxable. The taxing -- or millage -- rate specific to a given area is applied to that amount to determine what a property owner must pay. Various taxing entities, such as county government, school districts and other public agencies, divvy the revenue.

Generally speaking, about three-quarters of property-tax income goes to school districts, said Joe Thompson, Pulaski County's chief assessment administrator.

Kelsey Bailey, the Little Rock School District's chief financial officer, said $1.3 million of the $4.5 million at dispute in this case is for Little Rock schools.

"This one has potential, if they win, for others to piggyback on the same [theory]," Bailey said. "It would really create a great financial stress on the system if that's the case."

Walmart's filings with Hyde don't use the term "dark store," but the argument is similar to what other big-box retailers have used. The model calls on assessors to base their properties' worth on what comparable locations have fetched when closed and sold.

Walmart and its related real estate holding companies contend "that the [county] erred in its decision because the Assessor's appraised value is manifestly excessive, clearly erroneous, and unfair as compared with other similarly situated properties."

The company plans to call two nongovernmental appraisers as witnesses -- one to explain how he came to appraise the 10 stores and another to talk about national retail conditions -- the company's lawyers said in a filing.

Pulaski County countered in its legal brief that "sales of commercial retail stores across the nation and Arkansas are irrelevant for the purposes of valuing and equalizing property values in Pulaski County."

The county also has signaled in filings that it will argue that deed restrictions placed on some of the comparable properties further lower the values of the comparison points. Such restrictions can include prohibitions on operating grocery stores or other potentially competitive endeavors.

The sales approach desired by Walmart is one of three primary methods Arkansas assessors use to evaluate properties.

Other methods are based on how much income a property collects and actual cost -- what a company paid for land and construction, taking into account diminished value as the building ages.

The cost method is most commonly used for commercial properties, said Hill, the Washington County assessor.

Hanging over the disagreement is the reality that retail outlets across the country have shuttered in the face of digital competition, depressing demand for warehouselike buildings designed for in-person shoppers.

Hill in 2017 raised the alarm about pending dark-store challenges in Arkansas -- telling the Northwest Arkansas Democrat-Gazette that "it's like Darth Vader is coming in." Hill is one of the state's most outspoken opponents of the theory and has stuck to the Star Wars theme in formal presentations he gives.

"I haven't talked with an assessor yet that disagrees with the stance we're taking," Hill said. "We believe this is an improper way of valuing property."

Hyde will have 20 days to issue a decision, which either the county or Walmart may appeal to circuit court. Hyde is the county's chief executive and hears appeals of county board of equalization decisions; he acts as a jurist when the county court is in session.

Photo by John Sykes Jr.

Arkansas Education Commissioner Johnny Key is shown in this file photo.

Kelsey Bailey, the Little Rock School District’s chief financial officer, is shown in this photo.

Photo by Cary Jenkins

Judge Barry Hyde is shown in this photo.

Photo by Andy Shupe

Russell Hill, Washington County’s tax assessor, is shown in this file photo.

A Section on 07/17/2019

CORRECTION: Pulaski County Judge Barry Hyde acts as a jurist when the county court is in session, for example, when he hears appeals of property assessments. A previous version of this story misstated his role during county court hearings.