City Of Tuscaloosa Sues State For Failure To Update Internet Sales Tax Program

TUSCALOOSA, AL — The City of Tuscaloosa and Tuscaloosa City Schools (TCS) filed a highly anticipated joint lawsuit Tuesday that accuses the Alabama Department of Revenue (ADOR) of unconstitutionally allowing major online and national retailers to avoid paying traditional local sales taxes through the state’s Simplified Seller’s Use Tax (SSUT) program.

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The complaint, filed Tuesday in Montgomery County Circuit Court, has been expected for some time and claims the department and ADOR Commissioner Vernon Barnett have failed to update the SSUT program since a 2018 U.S. Supreme Court decision that gave states more authority to tax remote sellers.

“Alabama’s Simplified Sellers Use Tax takes revenue generated in our community and sends it elsewhere,” Tuscaloosa Mayor Walt Maddox said in a statement released Tuesday. “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.”

Tuscaloosa argues the voluntary, flat-rate tax gives merchants the option to choose the 8% SSUT rate over higher combined state and local rates, costing the city and Tuscaloosa City Schools millions of dollars in lost revenue each year.

ALSO READ: Understanding Tuscaloosa's Tug-Of-War Over Internet Sales Tax

The lawsuit insists that large companies — such as Amazon, Walmart, Target, Kroger, DoorDash and UberEats — have been improperly classified as “eligible sellers” or “marketplace facilitators” under the law, despite having a physical presence in Alabama that should require them to collect full state and local sales taxes on online sales.

"When online sales taxes paid by our community are sent elsewhere, our schools lose the very resources that help them excel," TCS Superintendent Mike Daria said. "Local dollars should stay local— supporting our educators, strengthening our classrooms, and ensuring our schools continue to make strong progress for our children."

One example provided to Patch over months of reporting showed that an order placed on the DoorDash app and picked up at a local fast-food restaurant like Chick-fil-A would be taxed at the voluntary 8% SSUT rate. Conversely, that same order placed on the Chick-fil-A app and picked up in the restaurant by the purchaser would be subject to local and state sales taxes.

The argument over SSUT and it's current revenue distribution model has also set Alabama's largest municipalities at odds with County Commissions across the state — elected bodies that make up the lion's share of the opposition to any changes to SSUT, along with some smaller towns who argue that proposed changes would only benefit the state's largest cities.

As was expected, the City of Mountain Brook also joined Tuscaloosa in the lawsuit against ADOR.

Patch previously reported that Tuscaloosa projects a $14.6 million revenue loss this fiscal year from the program, which it says also blocks municipalities from auditing participants’ sales. This has become another sore spot for city officials, who have claimed that such data has not been made available by ADOR to municipalities seeking to better understand the numbers.

SSUT was first created as a volunteer "opt-in" program when it was implemented in Alabama in 2016 and was initially designed to mimic sales taxes as a way to recoup revenue lost to online sales as the concept of online shopping grew in popularity.

This was followed a couple of years later by the landmark ruling by the U.S. Supreme Court, South Dakota v. Wayfair, which provided states the authority to tax out-of-state companies making online sales in their state.

At present, an 8% sales tax is collected from online sales in Alabama and then split down the middle and distributed between the state's coffers and local governments.

The aforementioned percentage can also be compared to the 10% sales tax collected from traditional brick-and-mortar businesses in places like Tuscaloosa.

Alabama then allocates 75% of its portion to the state general fund, while the rest of the state's share is statutorily required to go into the Education Trust Fund.

At the local level, the 4%, which is distributed from the state, is then divided again between municipalities, which receive 60%, while counties get 40%.

The city and school system are asking the court to declare parts of the SSUT law unconstitutional, remove unqualified participants from the program, and order them to collect and remit traditional sales taxes.

"This lawsuit is necessary to protect the revenue Tuscaloosa has earned and to safeguard our schools, first responders, and small businesses that rely on local dollars staying in the community where they were generated," Maddox said.

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