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

TUSCALOOSA, AL — Brookwood Mayor Joe Barger is keenly aware of the packages stacking up on doorsteps and delivery trucks cruising his city's streets.

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And during the holiday season especially, the local dollars spent on online purchases are impossible to ignore for the conservative small town mayor.

"The amount of money we lose from our local tax base due to online shopping is truly staggering and the general public has no comprehension of that because they haven't seen the numbers," Barger told Patch. "To have that money come back into our local tax base would be huge for us but I don't know how you capture that."

Simplified Sellers Use Tax (SSUT) is a mouthful to say and, to Barger's point, it's not exactly the sexiest concept when trying to grab the public's attention.

It's also not as "simple" as its name implies. Nevertheless, it's an ever-increasing source of revenue that's poised only to grow in the immediate future as retailers invest more and more each year in online sales.

"This is a complex issue and go ask Joe Blow on the street," District 3 County Commissioner Mark Nelson told Patch this week. "You think they understand what those letters mean? SSUT?"

Often referred to as the "internet sales tax," it's as complicated for policymakers to grapple with as it is an inevitable reality they will have to address, one way or another.

What's more, it's been an easily overlooked point of contention in Tuscaloosa County in recent years as the ever-complex economy evolves in the 21st century.

It's policy that highlights a battle of political wills, the root of competing realities and the frustrating nuances of sales tax revenue distribution in the online age.

You might think it's boring but if you've made it this far, you might be surprised.

The Basics of SSUT

To understand the debate, the best place to start is with a quick history lesson and a brief examination of how SSUT is structured.

I promise, this will be brief.

First created as a volunteer "opt-in" program when it was implemented in Alabama in 2016, SSUT was initially designed to mimick sales taxes as a way to recoup revenue lost to online sales.

A couple of years later, along came a landmark ruling by the U.S. Supreme Court — South Dakota v. Wayfair — that provided states with the authority to tax out-of-state companies making online sales in their state.

As it stands, 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. 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 — a token amount by many accounts.

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

"The fact the state of Alabama gets 4% probably bothers me more than anything," District 3 Commissioner Mark Nelson told Patch when asked about his views on the percentages.

Sterile numbers and boring history aside, though, local leaders are locked in an ongoing debate over the 8% internet sales tax and the 10% local sales tax.

The Debate

Tuscaloosa Mayor Walt Maddox sat at the head of a table in a City Hall conference room and worked through a detailed PowerPoint presentation as he made a passionate case for addressing the state's SSUT distribution model.

In the state of Alabama, there's arguably no bigger supporter of overhauling the SSUT system to benefit municipalities than Maddox.

"If I order a package in the city of Tuscaloosa, I should be taxed at the rate of the jurisdiction I'm in and I have that expectation that when I'm being taxed those dollars are flowing back into our community," Maddox told Patch. "SSUT as it is designed is a kind of scheme and what is happening is that the hard-earned tax dollars from people in this community are going outside of our city and county to places and the public has no idea where it's flowing."

The lengthy meeting with Maddox — prompted at the request of Tuscaloosa Patch — came the day after the Tuscaloosa County Commission voted on a brief resolution to inform the local legislative delegation ahead of the 2025 legislative session that the Commission would be opposed to any changes to "increase, change, revise or redistribute" proceeds from Alabama's SSUT.

It was a resolution that came and went with little fanfare or debate but seemed to underscore an idealogical gulf dividing the Commission and Tuscaloosa City Hall.

District 1 Commissioner Stan Acker, who represents a large swath of northern Tuscaloosa County, told Patch that he is generally opposed to tax increases, especially following the last few years of inflation endured by taxpayers.

And it was this closely held belief that he cited when asked about his staunch opposition to any proposed changes to the internet sales tax distribution model.

"I think that clearly was the common belief of the Commission as a whole as shown in our unanimous vote [on Dec. 4]," Acker said. "We also wanted to be clear in the communication with our legislative delegation that any efforts to change the current distribution models would have a negative impact on the long-term relationships between governmental entities in Tuscaloosa County.

"While there are always varying interests and priorities, we have long enjoyed an overall positive and cooperative approach with the municipalities, Boards of Education, and other entities in Tuscaloosa County," Acker added. "I would certainly like to see that cooperative partnership approach continue and hope it can."

The long-term relationships mentioned by Acker are indeed at the center of the debate, as municipalities like Northport and Tuscaloosa, along with both the city and county school systems, have found themselves at odds with the County Commission over SSUT.

"The Tuscaloosa City Schools currently receive no sales tax revenue from online purchases from stores that do not have a brick-and-mortar presence in Alabama," Tuscaloosa City Schools Superintendent Mike Daria told Patch. "According to the City of Tuscaloosa's estimates, this is a loss of about $4.4 million a year to our school system that we would otherwise receive. At the same time, the state's Education Trust Fund also does not receive any sales tax from these online purchases, which means a double hit for schools."

Daria's comments come just weeks after Tuscaloosa residents voted down a proposed property tax increase that, had it passed, would've resulted in additional revenue generated for Tuscaloosa City Schools (TCS), which is currently facing down a post-pandemic financial shortfall now that the heavy influx of federal aid dollars have dried up.

A similar property tax measure for the Tuscaloosa County School System was also voted down the previous year. So, with tax increases seemingly off the table for the next decade or beyond as it relates to a solution for supplemental public school funding, municipal and school system leaders are looking at options like SSUT to aid in closing the gap.

"As TCS is preparing for a $7.5 million a year shortfall in our budget and is cutting spending everywhere we can, we desperately need additional funding," Daria said. "We know we are not alone in this, as most school districts in this state do not receive sales tax revenue from online purchases. We welcome further discussion about this on both the local and state level."

Apart from the school debate, Northport City Administrator Glenda Webb is quite familiar with the problems facing the city she serves and the City of Tuscaloosa, where she previously served as city attorney.

While Northport is not in a dire financial situation compared to the two local school systems, the city has been growing at a rapid pace and steadily seeing its revenue numbers climb along with its population.

As echoed by others on the municipal side of the argument, Webb said proposed changes to the internet sales tax funding model would be an approach that would benefit the small businesses that make up the backbone of the local economy.

"I can say that Northport certainly understands that large online retailers make it difficult for local brick-and-mortar stores, and revisions to the SSUT that would treat online retailers in parity with local stores would be welcome," she told Patch.

City of Tuscaloosa District 3 Councilor Norman Crow, who serves as the immediate past-chair of the Tuscaloosa County Economic Development Authority Board of Directors, also offered up an informed business perspective on the south side of the Hugh Thomas Bridge.

“I understand how difficult it can be as a business owner in Alabama, and one of the reasons that fixing SSUT is so important is because we have to protect small businesses across our communities and state, " Crow said in a statement. "The dollars that our citizens spend need to remain in our communities to help fund schools, public safety and even roads.”

This is a notion also championed by the Chamber of Commerce of West Alabama, which is pushing for equalized rates as part of its most-recent legislative policy agenda.

"Our stance is we would like to see a more fair marketplace," Chamber President and former Republican state representative Kyle South told Patch. "We want our local brick-and-mortar stores to have a more equalized rate compared to those online sellers and we just don't want our local retailers to have an unfair competitive disadvantage, which they currently do.

"It's a 2% difference if you buy something online as opposed to in-store," South added. "I think what we have proposed to go in through our policy agenda is to close some of the delivery loopholes."

The Kroger Loophole

Tuscaloosa Mayor Walt Maddox had to steady his emotions over the current state of SSUT at times during our meeting last week, especially when talk turned to what he and others refer to as the "Kroger Loophole."

"Every time you see that Kroger delivery truck, what you're seeing is earned revenue not going to our school system, not going to our police department or fire department and not going into our roads," he told Patch. "I'm not sure on what planet it makes sense that an entity that operates in the state of Alabama is now qualifying as an out-of-state corporation now that they have dot com in their name."

Indeed, Kroger operates a distribution center in the Birmingham metro and has been one of the leaders in the supermarket sector to pioneer a warehouse and delivery model tailored to online customers that is becoming the trend in the industry.

Walmart is taking a similar approach to its online customers by revamping its website and offerings, signaling a tidal shift in the retail sector toward investing more in online retail infrastructure as opposed to traditional brick-and-mortar stores.

What Maddox is proposing to combat this is not a tax increase in the traditional sense but bringing large online retailers who do have operations in Alabama to be held to the same sales tax rate as brick-and-mortar retailers in Tuscaloosa County.

For example, if a purchase is made inside the store at Home Depot in Tuscaloosa, the sales tax would be 10%. But if the customer decided to do their shopping for that same item as they lounge on the couch at home in Northport, the item could theoretically be delivered to their house from the same store, while only carrying an 8% sales tax.

"The taxpayers have been clear they do not want to see us add any new taxes," Maddox said. "The taxpayers also tell us they want to make sure the city gets what it earns. We're not asking for oil money from the Gulf of Mexico or Coal Severance Tax money. All we're asking for is to receive the dollars that were earned in Tuscaloosa by virtue of the investments we've made over the years to grow our community."

In an email exchange independently provided to Tuscaloosa Patch from both sides of the issue, Maddox again made his case after the County Commission passed a resolution last week to oppose any changes to the SSUT distribution model.

Maddox, in the communication, made the argument that the Commission should support the state's transition to destination sourcing — meaning that sales are taxed at the location where the buyer takes possession of the item sold.

"The County Commission should support this," he told the elected body. "Based on the audited FY 23 revenue information provided, the Tuscaloosa County Sales Tax District (the County’s 3 percent sales tax) would have earned over $22 million above its collections."

Maddox then provided the following breakdown per recipient of revenue gained from fiscal year 2023 collections on the 3% countywide sales tax:

• Tuscaloosa County Schools — $5.5 million
• Tuscaloosa City Schools — $4.4 million
• City of Tuscaloosa — $4.2 million
• Tuscaloosa County — $3.1 million
• City of Northport — $1.1 million
• Tuscaloosa County Road Improvement Commission — $2.2 million
• DCH Health System — $1.4 million

"The DCH percentage of the Tuscaloosa County SSUT may be small compared to other recipients, but is important for our health system," DCH Health System CEO Katrina Keefer told Patch. "We currently receive $7-8 million a year that helps to offset the nearly $30 million a year in uncompensated care DCH provides."

Keefer went on to say that the West Alabama health care provider is encouraging all of its employees to “shop local,” not just this holiday season but year-round — underscoring the economically holistic viewpoint of the hospital system.

"Supporting our local merchants and keeping high-quality retail in Tuscaloosa County is important when I’m recruiting caregivers," Keefer said. "There are so many downstream effects for our schools, roads, and hospitals, and I want to do what we can to keep our community’s money in our community."

On the municipal government side, Northport City Council President Christy Bobo, who chairs the council's Finance Committee, told Patch that she took note of Maddox's argument over addressing SSUT issues when she heard the Tuscaloosa mayor speak at a recent conference for the Alabama League of Municipalities.

Still, Bobo took a slightly different approach that also echoed the Chamber of Commerce of West Alabama's insistence that more has to be done to support brick-and-mortar businesses in the local economy.

"When [Maddox] spoke about it and how vastly it has impacted the community, and not only the businesses and schools but even just the money we have to improve infrastructure, it really resonated with me," she said.

In Bobo's view, it all boiled down to fairness for local retailers.

"We think about doing things online because of the convenience but if those same things were available in the stores would we go to the stores?" she asked. "It has even affected the way I buy groceries and my thinking has changed. I know there are a lot of people in Tuscaloosa who buy groceries Northport and have them delivered.

"Kroger is a good company but I don't think people realize what they are doing to our local economy," Bobo added. "Honestly, they are getting unfair treatment if you compare it with our local stores and I feel like we need to support the businesses that invest in our community. It's very unfair to them."

Maddox also sharpened the scope of his argument by citing the impact on a beloved and heavily involved local business — Hudson-Poole Fine Jewelers.

Founded in 1985, the business is a longstanding local institution and invests back into the community to causes like the DCH Cancer Center and Adopt-A-School programs, thanks to the generosity of its owner, Gene "Poodgie" Poole

Maddox pointed out that Hudson-Poole has 15 full-time employees and is a significant contributor to the local tax base. However, Hudson-Poole is subject to the regular 10% local sales tax rate, while its largest competitor — Diamonds Direct — is a much larger national brand, with its nearest location in Mountain Brook.

And like Amazon, Kroger, DoorDash and GrubHub, Diamonds Direct is only charged an 8% sales tax rate, thanks to the current SSUT model.

"The impact on small business in staggering," Maddox said. "We're telling Poodgie Poole, Southern Ale House and all these local small businesses that Amazon and out-of-state corporations in California and Oregon are more important than home-owned businesses. I never thought I'd see the day when we'd put people in California and New York ahead of the people on Main Street."

Why The Opposition?

So if leaders in local municipalities like Northport and Tuscaloosa are singing the same song about closing the "Kroger loophole," why did the County Commission — the biggest kid on the proverbial block — unanimously approve a resolution voicing its opposition to any changes to the state's SSUT model?

After extensive reporting, the answer is ironically simple.

While not without questions before offering lukewarm support of Maddox's proposal to close the "Kroger loophole," conversations with members of the County Commission and the overwhelmingly Republican local legislative delegation show that they may have more of a stomach for such a measure than they'd publicly admit.

This is no doubt due to the fact their respective districts would benefit from the revenue generated without any action by the lawmakers and the fact that the Alabama Department of Revenue could make the change without an act of the legislature or lobbying from local elected officials.

Those in opposition to sweeping changes to the SSUT have questions about such an action, sure, but it's not Maddox's push that prompted the County Commission to act.

"The whole design was better than nothing," District 3 County Commissioner Mark Nelson told Patch about the genesis of SSUT. "I do think that point of sale is not a horrible idea, but tell me which counties are going to agree to change it? It's not going to be 57 counties that are considered 'small.'"

Brookwood Mayor Joe Barger also mulled the question of how the City of Tuscaloosa could claim dominion over the sales tax revenue that Maddox says the city has "earned."

"I know it costs a lot to run the City of Tuscaloosa," Barger told Patch. "But it takes a lot of money to run the City of Brookwood. What I earn is what I budget. I'm not going to run out here to my neighbors and take their money. You have to figure out how to earn your money."

When asked to expound upon the concept of earned revenue that isn't being collected, Maddox explained that the city's approach is no different from how the city has judged sales tax revenue for well over a hundred years — the packages delivered.

"It follows the way the [Alabama] Constitution's laws have been set," Maddox told Patch. "The reality of it is, we don't except, nor should the city receive, tax revenue that's earned by Brookwood, Lake View, Coaling or Coker. And I think the reverse should be true.

"That's why we all work to grow our communities and we've always thought, and correctly so until online sales, you grow your community," he added. "It keeps your tax rates low and keeps your services high and SSUT forfeits that but doesn't have to because technology allows us a way to make sure that's where taxes are earned and invested."

But instead of Maddox's push to reform the SSUT model, what stirred up the County Commission last week by all accounts were a pair of pre-filed bills by State Rep. Chris England, a Democrat from Tuscaloosa, who has been an outspoken proponent for internet sales tax reform in recent years.

After extensive conversations with the local legislative delegation and the County Commission, Tuscaloosa Patch learned that the bills are Dead On Arrival, viewed as political grandstanding and unlikely to advance very far in the Alabama Statehouse.

Speaking on background with Tuscaloosa Patch, the prevailing sentiment from county officials seemed to be that they — or rather, their coffers — were unjustly targeted as England sought good faith reforms to the law that would have seen a chunk of county SSUT money reallocated for local schools.

Tuscaloosa County Probate Judge Rob Robertson, who chairs the County Commission, told Patch that the resolution was simply the county stating its position and pointed out the common thread as it relates to the two sides of the debate.

To Robertson's point, the ongoing battle between the Alabama League of Municipalities and the Association of County Commissions of Alabama is regularly mired in competing interpretations of who should get what, to put it simply.

"There are a lot of small municipalities but they are going to be all for getting as much revenue as they can," Robertson told Patch. "But we have different population bases. We have different people in the county who look at things differently. They live outside of the city limits for varying reasons but those should all be taken into account.

"But as I recognize the dynamics and the revenue streams, the needs [for municipalities] are different than counties, that's a fact," Robertson added. "They have different opinions and different desires for how SSUT should play out than how how the counties do, across the board, and we probably look at taxation differently as a county than the municipalities do."

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