Costco puts plans for new stores on hold
Costco has put a hold on plans to develop a new store in Kalispell, or new stores anywhere in Montana, because of a proposed tax on "box stores" that will be considered by the state Legislature, a Costco executive said Friday.
"We feel this proposal is punitive against Costco and we are going to hold off on any additional investment in Montana until this is resolved," said Doug Schutt, chief operating officer for Costco's Northern Division.
Costco has yet to break ground on its new store at the Spring Prairie Center on U.S. 93 north of Kalispell, and construction probably could not get under way until spring anyway because of weather.
But Schutt said that if the bill passes the Legislature and is signed by the governor, "there is a good chance" that Costco will abandon the Kalispell store, which was expected to be almost twice the size of the current Costco store on U.S. 2.
"I'm not saying that would happen 100 percent," Schutt said. "I would say most probably."
The bill, sponsored by Sen. Ken Toole, D-Helena, would impose a 1 percent tax on gross retail receipts between $10 million and $20 million; a 1.5 percent tax on receipts between $20 million and $30 million; and a 2 percent tax on receipts above $30 million.
The bill would impact other large retailers such as Wal-Mart, Kmart and ShopKo, along with dozens of grocery stores, according to Brad Griffin, a lobbyist for the Montana Retail Association, a group that has already staked out vigorous opposition to the legislation.
A similar measure, defeated in the 2003 session by a narrow 26-24 vote in the Senate, was projected to raise roughly $60 million annually for the state.
Because of the Senate's current makeup of 27 Democrats and 23 Republicans, Griffin speculates the bill could easily clear the Senate hurdle this time around.
Gov. Brian Schweitzer has expressed opposition to new taxes, but he has yet to see the Legislature's overall spending package, which could easily exceed the governor's spending plan.
"They are under pressure to raise money for education, so they may be looking at this as a pot of gold," Griffin said of state lawmakers.
Defending his bill, Toole said retailers such as Costco with relatively high pay scales might be exempt from the tax because of special provisions in the bill. The exemption applies to stores that provide entry-level employees with a compensation package of at least $22,000 a year and have no more than 25 percent of their employees working part-time.
"I think of all the big box stores, Costco is one that this bill won't apply to," said Toole, defending his bill.
But that's not the case, according to Schutt.
Costco would be taxed, he said, "because more than 25 percent of our employees are part-time."
Toole said his intent is to shift Montana's tax code in the direction of the state's changing economy, with revenue going to the general fund, hopefully to provide some form of property tax relief for Montanans.
"We are moving dramatically away from a resource extractive economy and our tax code has not been keeping pace," he said. "Much more of our economy is service-oriented."
Toole contends that big box stores "bring very little into our communities." Smaller, local businesses often can't compete and "they go under" because of box stores, he said.
"The wages are generally low, they often don't advertise locally, they have their own trucking and service companies," he said. "Right down the line, their whole business model is about squeezing the margin."
Griffin stressed that most box stores operate on extremely narrow profit margins, and the tax that Toole is proposing will cut excessively into those margins.
Griffin contends that the box-store tax would amount to a "hidden sales tax," with the stores passing additional costs on to consumers.
But Toole argues that is not the case. When a box-store tax was considered in the last session, he said, backers found price comparisons for certain stores doing business in a variety of states.
"Each state clearly has very different tax structures," he said. "And yet the prices for the items were exactly the same."
Griffin said there are no other states that single out box stores for additional taxes.
Liz Harris, president of the Flathead area economic development group Jobs Now, said she can understand Costco's position and she considers the box-store tax problematic.
"It does nothing to enhance our statewide reputation as a reasonable place to do business," she said.
Harris also questions whether the notion of singling out certain types of retail businesses for taxation would be legally defensible.
Within the Montana Economic Developers Association, there are both supporters and opponents of the bill, said Harris, who serves on the association's legislative committee.
So far, the association has not taken an official stance on the legislation.
Costco announced last June its plans to build a 136,000-square-foot store at the Spring Prairie Center, almost double the size of Costco's 72,000-square-foot store on U.S. 2.
The company's plan to sell the existing store building is of particular interest to Harris, who saw that building as an opportunity for businesses requiring assembly or light manufacturing space.
"It's got a concrete floor and big bay doors," she said. "We have so few sites and facilities here for any businesses of any kind of size at all."
A press release issued in June by the Spring Prairie developer announced that both Costco and the Lowe's home improvement store were expected to open in the first quarter of this year. Lowe's opened the first week of January.
But Costco closed on the transaction for the new store's location just last November, and there's been no development at the site so far.
Schutt said Costco does have some obligations to the developer, Goldberg Properties Inc., because of that transaction.
"We would honor our agreement to do any kind of site improvements, but we have no obligation to open up a retail establishment," Schutt said.
Reporter Jim Mann may be reached at 758-4407 or by e-mail at jmann@dailyinterlake.com