In pandemic, taxes on online purchases up; trend concerns educators

In pandemic, taxes on online purchases up; trend concerns educators

By MARY SELL, Alabama Daily News

In the months that Alabamians largely stayed home because of COVID-19, tax collections on goods bought online increased sharply while sales tax on goods bought at bricks-and-mortar locations dropped.

The latter largely supports education in the state. Of the former, the Simplified Sellers and Use Tax created by lawmakers in 2015, only a fraction currently supports schools, the rest going to state and local governments' general funds. May tax collections for SSUT were up 84.3%, according to the Alabama Department of Revenue. Sales tax, collected in bricks-and-mortar stores, was down 12.36%.

While any revenue growth, especially during a pandemic, is largely good news, increases in SSUT collections had education groups concerned prior to COVID-19 and even more so now.

“Many school districts receive a portion of the local sales tax collected from sales that are generated in traditional brick-and-mortar stores in their districts,” Ryan Hollingsworth, executive director of School Superintendents of Alabama, told Alabama Daily News. “However, by Alabama defining online sales tax as a ‘use tax’, online sales tax is not considered sales tax.”

And while tax collection at physical locations still far outpaces online retail, sales tax is down about .5% year-over-year. The SSUT collection has about doubled.

“As the buying habits of people continue to move toward online purchasing, our schools will continue to see the financial losses grow,” Hollingsworth said. “The initial mindset was this online sales tax revenue is new money that we have not been receiving.  While maybe true at that time, it is certainly not true today with the latest reports as proof.”

Sales tax changes
Sales tax changes (Source: Alabama Department of Revenue)

The SSUT collections in February, March and April were all up 50% to 55% over the year prior.

The statewide SSUT  law took effect as a voluntary 8% tax on online sellers in 2015. The law became mandatory for most online retailers beginning in January 2019, at which point online sales tax revenue jumped significantly.

After deducting the cost of collection, 50% of the revenue goes to the state where it’s 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. Nothing in state law says that locally allocated money has to be given to schools.

Sonny Brasfield, executive director of the Association of County Commissioners of Alabama, said sales tax revenue is essentially flat year-to-date, meaning schools haven’t lost revenue. And increases in SSUT collections are at least in part because of changes made in January of 2019 to capture more online sales, including third-party retailers on Amazon. Counties advocated for those changes, he said.

“That really turned the page on SSUT, from it being a good idea to something that people all over the country were trying to emulate,” Brasfield said. 

“We wouldn’t have seen this growth, even with COVID (without those 2019 changes0,” he said. 

He also said that it’s not realistic to think SSUT revenue will continue to grow as it has in the last year. 

Hollingsworth explains the situation this way: If someone buys a fishing pole at a local sporting goods store, they pay 4% sales tax to the state, which goes to the ETF. Sales tax is the second largest funding source to the ETF, income tax is No. 1. At that local store, a person is also paying local sales tax. The amount varies by location, but at least some of it flows to local schools, Hollingsworth explained. With SSUT, that local tax for schools is gone. 

“At the local school level, your revenue comes from federal, state and local dollars,” he said. “Personnel and programs are funded from these same three fund sources.  If the local fund sources continue to decrease, our local systems will have to make cuts in programs and personnel, no doubt about it,” Hollingsworth said.

Brasfield argues that counties need that revenue too. He’s pointed out multiple times this year that 2015 prison reforms in Montgomery have kept more state inmates in county jails, costing them nearly $100 million, he said.

“The state Legislature hasn’t given us a penny for that,” he said. “That’s one example of what counties have been able to do with this revenue.” 

Watching Morgan County

In 2019, at the request of local school leaders, Sen. Arthur Orr, R-Decatur, sponsored a successful bill to send most of the SSUT funds for Morgan County to the county’s school systems. Orr has said the bill was modeled after how local sales tax dollars are distributed. 

“It’s clear that the SSUT increases are coming at the expense of bricks-and-mortar taxes that go toward education,” Orr told Alabama Daily News. “At the end of the day, the internet sales taxes are coming at the expense of school children.”

But Morgan County leaders refused to comply with the local law, saying it was unconstitutional. The Alabama Education Association sued on behalf of its members and local school systems later joining the lawsuit. The county commission’s legal position focused on Section 105 of the Alabama Constitution, which generally prohibits a local law from contradicting a statewide law. Earlier this year, a Montgomery County Circuit Court judge ruled that the local law was constitutional. The county commission has appealed and that case is pending.

“There is no doubt, this bill has statewide impact,” Morgan County Commission Chairman Ray Long told Alabama Daily News on Monday. “It doesn’t just affect Morgan County.”

Long said that traditional sales tax in the county is up, despite COVID-19, 5% year over year.

“Everyone that gets the sales tax is up,” he said about the schools on other entities. 

The county commission association isn’t directly involved in the lawsuit, but filed an amicus brief on behalf of Morgan County. 

“For us, it’s not about SSUT at all, it’s about counties being expected to deliver programs and services while general fund money is taken away,” Brasfield said.

Orr said groups and lawmakers are watching the Morgan County lawsuit.

“This is a test case and a lot of school districts around the state are watching and I’ve had numerous lawmakers around the state tell me they plan to follow with similar actions,” Orr said.

Hollingsworth agreed other systems are watching Morgan County, but he hopes it won’t take more local legislation.

“You would hope that the local municipalities and the local county commissioners would acknowledge this for what it is and do the right thing and either give that portion to the school districts as they do in a brick-and-mortar store or share that with the school districts,” Hollingsworth said. He said in some counties, those conversations are happening.

In its annual poll earlier this year, the Public Affairs Research Council of Alabama asked respondents if online sales taxes should go to local schools in a similar manner as traditional sales taxes, 76.5% said yes.

Long said that if the original law is going to be changed, it should be done statewide and not county by county. 

Meanwhile, both Long and Brassfield said if education groups are worried about SSUT’s impact on education, they should look at where larger portions of the revenue are now going, including municipalities and the state General Fund.

In fiscal 2019, the SSUT was worth $69.9 million for the General Fund and about $23.3 million for the Education Trust Fund.

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