Online sales tax in recent years has been a boon for Alabama’s General Fund and some counties and cities, but a new report says not everyone is winning under the current collection and distribution system.
School systems, large cities and counties, and brick-and-mortar stores may be losing out, the report from the Public Affairs Research Council of Alabama said.
“Alabama’s online sales tax program is still in its infancy, but it is one of the state’s emerging revenue sources with the most growth potential,” Ryan Hankins, the executive director of the Public Affairs Research Council of Alabama, said in a written statement today. “In the six years since the (Simplified Sellers Use Tax) program’s enactment, it has been a boon to state and local budgets — generating more than $1.8 billion over its lifetime that otherwise would have been lost. But is the SSUT collecting as much as other e-commerce tax programs could? Our analysis says not likely.”
That’s at least in part because the 8% tax on online purchases that began in 2016 and became a requirement in 2019 is less than what people would pay in taxes in a lot of bricks-and-mortar stores around the state.
As the recent debate on whether the state should cut its sales tax on food items has shown, when local taxes are added to the tab, some physical stores have to charge 10% or more. The average total sales tax rate in the state is 9.24%, per PARCA.
So, depending on where they’re located, those physical stores are at a competitive disadvantage.
Sen. Arthur Orr, R-Decatur, said Monday the current system, as shown in the report, favors sellers who are presumably out-of-state over local mom-and-pop retailers.
“(Those local retailers) are also paying property taxes, unemployment tax, payroll taxes and a whole host of other taxes and we’re giving a benefit to those out-of-state who are paying none of the above,” Orr said.
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.
According to the PARCA report, in 2022 a total of $634 million in SSUT was collected. The General Fund received $238 million, municipalities $190 million, counties $127 million and the Education Trust Fund $79 million.
Senate General Fund budget chairman Sen. Greg Albritton, R-Range, said since the SSUT’s creation in Alabama, the distribution compromise has perpetually been under attack.
“That was heavily argued over and now to come in and say it’s unfair, I think that’s disingenuous,” Albritton said.
Albritton said the SSUT “is benefiting the whole state dramatically” and gathering revenue previously uncollected.
The PARCA report says counties with little income from sales tax, the SSUT distribution represents new revenue. But counties that generate significant sales tax revenue might be missing out on revenue due to purchases moving online.
For example, in fiscal year 2021, Jefferson County received $14.2 million from SSUT collections. According to PARCA calculations, Jefferson County accounted for about 17% of the state’s total in-state sales tax collections. If Jefferson County accounted for 17% of SSUT-eligible spending as well, it would have had more than $1 billion in taxable online sales. And if its countywide sales tax was applied to that total, the it would have collected $28 million in revenue from that online commerce. That’s nearly double what it actually received.
On the flip side, Greene County received $195,000 in SSUT collections in 2021. It would have collected only $66,000 if it applied the county’s 3% rate to its estimated level of SSUT-eligible sales, PARCA estimates.
The same discrepancies apply to the state’s largest cities.
Additionally, the distribution of the SSUT is different from that of the locally collected sales taxes, especially when it comes to schools.
Unlike sales taxes, local governments are not obligated to pass along a portion to the schools, though some do.
As of December 2022, only eight school systems voluntarily reported receiving funding from their county’s SSUT revenue, and only seven school systems reported receiving funding from their city’s SSUT revenue, according to Alabama Department of Education records.
“We’ve watched the (Simplified Sellers Use Tax) provide a vital source of growth revenue to support Alabama’s General Fund,” Thomas Spencer, PARCA senior research associate, said in today’s statement. “But as commerce increasingly moves online, the differences between the online sales tax and the traditional sales tax creates more impact, particularly at the local level.”
In early 2021, the Alabama Supreme Court upheld the constitutionality of a 2019 local law by Orr that directed the bulk of revenue from online sales tax received by the county commission to the county’s public schools.
At the time, Orr said the local bill mirrored that of the county’s existing bricks-and-mortar sales tax distribution — revenue that has dipped as more people shop online.
After the court ruling, some expected more legislation like Orr’s in 2019, but that hasn’t happened.
“I would predict there’ll be more targeting of local SSUT money when education funding gets tighter in the months and years ahead,” Orr said. “Right now, we are blessed on the education side of the ledger.”
Lawmakers are currently working on record 2024 General Fund and education budgets and the PARCA report notes there is likely little appetite to change the current SSUT model. But it offers three suggestions:
- Raising SSUT’s rate to match the prevailing local sales tax rate.
- Joining the 24 other states participating in the streamlined sales tax program.
- Building a new system for online retailers to look up and submit sales taxes based on where the purchase is made.