The City of Tuscaloosa on Tuesday filed an expected lawsuit over how the state collects and distributes online sales tax revenue, arguing that many participating merchants with physical presences in Alabama should be paying traditional state and local sales taxes.
“This lawsuit seeks to declare the (Simplified Sellers Use Tax) Statute invalid and unconstitutional under the Alabama Constitution as to ‘eligible sellers’ and to enjoin the Commissioner from further enforcement of the SSUT Statute regarding that category of participants,” the lawsuit filed in Montgomery Circuit Court reads. It names the Alabama Revenue Commissioner Vernon Barnett as the defendant.
Tuscaloosa City Schools and the City of Mountain Brook are also plaintiffs.
They want the state to revamp the tax collection system so retailers with stores and facilities in the state remit to the state for online purchases the same state and local taxes they would for in-store purchases.
Such a change could mean millions more in annual revenue for the cities, and many others.
“Alabama’s Simplified Sellers Use Tax takes revenue generated in our community and sends it elsewhere,” Tuscaloosa Mayor Walt Maddox said in a written statement. “For nearly a decade, we have proposed legislative changes and attempted to work with the Alabama Department of Revenue to make regulatory updates to fix SSUT. Despite our repeated efforts, our concerns remain unaddressed, leaving us no choice but to take legal action.”
A comment from Barnett’s office was not available Tuesday afternoon.
The 8% tax on online purchases began in 2016 and became a requirement in 2019. Fifty percent of online sales tax revenue collected goes to the state where it is further split, 75% to the state General Fund and 25% to the Education Trust Fund. The other half is split among local governments, 40% to counties on a population basis and 60% to municipalities on a population basis.
That formula was worked out in legislation nearly a decade ago.
Meanwhile, all of the state’s 4% sales tax collected on in-store purchases goes to the state’s Education Trust Fund, which supports K-12 schools, community colleges and universities in the state. And cities and counties have the option of local taxes on brick-and-mortar purchases. Tuscaloosa, for example, has a 3% sales tax, and the county has a separate 3%. So, a total tax of 10% is added to in-store purchases there.
Tuscaloosa and other municipalities argue they’re losing out because their populations do a significant amount of online shopping and too much of their tax dollars are going elsewhere. Local sales tax paid in-store would stay in their communities.
The SSUT was worth a total of $851.1 million in 2024, up from $386.3 million in fiscal 2020, according to the Alabama Department of Revenue.
Worth almost $297 million in the General Fund so far this fiscal year, that’s money lawmakers want to protect. Last month, Sen. Greg Albritton, the Senate General Fund budget committee, called talks of a lawsuit by cities a “money grab.”
Albritton, R-Range, also said changes to the formula would create “a loser somewhere.”
Several bills to modify the SSUT formula have been filed, but have failed in the Legislature in recent years. Many Republicans opposed any idea that would increase the online tax, even to put it on par with local and state taxes.