A bill that would increase the sales tax on online purchases to 9.3% is expected on the House floor Tuesday.
New revenue collected under House Bill 258 would be shared between counties, cities and school systems. Advocates for the bill say those groups are missing out under the Simplified Sellers Use Tax formula that became a requirement for online purchases in 2019.
The current tax is 8% and its distribution, including 50% to the state, isn’t impacted under the new legislation.
There’s a caveat with HB258 too. It only goes into effect if House Bill 257 becomes law. That’s Rep. Joe Lovvorn’s proposal to create the “Alabama Adventure Awaits” tax holiday, taking sales tax, for one day, off of dozens of sporting goods and outdoor items, from tents to firearms to some boats.
“This is a way to indirectly offset some of the cost of the tax holiday that Rep. Lovvorn’s bill creates,” Rep. Chris England, D-Tuscaloosa, said in committee last week about the SSUT bill he’s sponsoring.
State sales tax revenue from bricks-and-mortar store purchases goes to the state education budget. England and Lovvorn describe the SSUT bill approved in committee as an indirect way to give schools back some of what they’ll lose under the tax holiday bill. Municipalities see the largest gain in the bill.
“My sales tax holiday does create a hole in education funding, even though I think it will be a generator of additional revenue, (encouraging) people to invest in other items to enjoy the outdoors in Alabama” Lovvorn, R-Auburn, told Alabama Daily News on Friday. He said he wants to give people a tax break on enjoying recreation in Alabama without penalizing schools.
“Above all, this is a small business fairness bill,” Lovvorn said. “The way our current SSUT is structured, it gives a disadvantage to the brick-and-mortar stores that invest in our state and gives priority to out-of-state businesses that exist on the internet.”
Because SSUT is 8%, people often pay less in tax than they would if they bought the same products locally. In the city of Montgomery, residents pay a combined 10% in state and local taxes.
The average total sales tax rate in the state is 9.24%, the Public Affairs Research Council of Alabama said last year. A report by PARCA said that while SSUT has been beneficial to the state, but some school systems, large cities and counties and brick-and-mortar stores may be losing out.
Currently, fifty percent of the SSUT 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.
The statewide SSUT law took effect as a voluntary 8% tax on online sellers in 2015. The tax became mandatory in January 2019, at which point online sales tax revenue jumped significantly. Online sales tax collection was a boon to both the state General Fund and education budgets during the pandemic.
As originally filed, HB258 would have split the new SSUT revenue 80/20 between municipalities and counties. The bill was substituted in committee Wednesday to include schools. It is expected to generate $79 million for cities, $18 million for counties and $24 million for schools, according to the most recent fiscal note.
Sixty-five percent of the new revenue would go to municipalities with 65% of that to municipalities with populations of 50,000 or greater and 35% to municipalities with a population less than 50,000. Fifteen percent would go to counties based on population. Twenty percent would be distributed to local school systems based on enrollment size.
Lovvorn, chairman of the powerful Rules Committee that selects the legislation to be voted on in the House each legislative day, said both bills will be on the House floor Tuesday.
The League of Municipalities, the Association of County Commissions of Alabama and the Alabama Education Association are supportive of the amended SSUT bill.
“We were certainly open to discussions about the inclusion of education, especially if the funding could go directly to the local boards of education to deal with their needs at the total level,” ACCA Executive Director Sonny Brasfield told ADN on Friday.
Allison King, government relations director for the Alabama Education Association, said she’s glad to see a revenue increase bill paired with a decrease bill. That’s not the norm.
“So many of the tax credit bills that we see are just cuts, with no plans to replace revenue,” King said.
“… We are so appreciative of them doing that.”
House Bill 257, the tax holiday bill, was changed in committee to one day in May, not two weekends per year. Lovvorn has also taken powerboats off the list of items exempt from state sales tax. Those changes take the estimated annual fiscal impact from about $28 million to about $14 million.
It was approved unanimously in committee, but later in discussions Rep. Debbie Woods, R-Valley, noted the cost of Lovvorn’s proposal. She’s made inquiries this session about the cost of providing paid maternity and paternity leave to Alabama teachers.
“We could offer six weeks paid maternity leave to every educator, male and female, for $28 million,” she told the committee. “For $14 million, we could offer three weeks. I know we’re giving a tax break, but we’re the education committee, and we could really do something to impact our teachers across the state. And we’re not evening talking about that, we’re talking about allowing people to come in and buy things that make them happy. I’m not saying that’s a bad thing because I like those things too. But it makes me pause when I see these huge numbers and wonder what we’re doing to impact the people who are in our classrooms every day with our kids.”
Wood and Rep. Jamie Kiel, R-Russellville, voted against the SSUT bill in committee.
The bill also requires the Alabama Department of Revenue to recalculate the rate every five years based on state and local sales taxes. Kiel questioned whether the bill would encourage municipalities to increase local taxes.
“Raising the online sales tax to match the sales tax rates of local cities could cause an endless cycle of raising taxes,” he later told ADN. “If cities and counties are concerned about their local businesses being competitive, why not lower their local sales tax rate to match the online tax rate?”
Supporters know some are critical of the SSUT increase. Brasfield said he considers it an “update” on the state’s very successful internet sales tax formula that’s been a boon to both the General Fund and education budgets.
“When we passed it in 2015, 8% was the average for sales tax around the state, that’s how it got picked,” he said. “So this is updating the program.”
Brasfield pointed out that Alabamians can request SSUT refunds if they live in areas where the combined sales tax is less than 8%.