Hartselle City Schools on Tuesday filed suit against the Morgan County Commission over its refusal to distribute online sales taxes as required by a local law.
The parties Wednesday agreed that until the lawsuit is resolved, the commission would make monthly transfers of the money in dispute to a Montgomery financial institution, according to a statement by the Alabama Education Association.
In addition to Hartselle City Schools, the lawsuit was brought by the Hartselle City Education Association, the Decatur Education Association and the Morgan County Education Association, which the complaint describes as organizations for public school education workers. Several of the attorneys representing the plaintiffs are employed by the Alabama Education Association.
The lawsuit, along with a motion for a temporary restraining order, was filed in Montgomery County Circuit Court. The complaint names each of the Morgan County commissioners as defendants, as well as Vernon Barnett, commissioner of the Alabama Department of Revenue.
Barnett was named as a defendant because his department is responsible for collecting online sales taxes and for distributing a portion of those taxes to the Morgan County Commission. His status as a defendant is what allowed the complaint to be filed in Montgomery County rather that Morgan County.
The genesis of the dispute is a local law sponsored by state Sen. Arthur Orr, R-Decatur, and passed by the Legislature in May. The law, specific to Morgan County, requires the commission to redirect all but 5% of the online sales taxes it receives.
The local law took effect Tuesday with the beginning of the 2020 fiscal year and requires the commission to send 85% of the remaining funds to the three public school systems in the county, to be distributed proportionally based on enrollment. Another 1.5% of the funds are required under the local law to go to volunteer fire departments and 13.5% to Morgan County Schools. The bill’s formula divides the online sales taxes in roughly the same way brick-and-mortar sales taxes are divided.
"The money that Sen. Orr secured for us in the local legislation was key to making sure our students have the best opportunity for success," Hartselle Superintendent Dee Dee Jones said in a statement Wednesday. "The cuts that would be necessary due to this loss of funds would be devastating, as would us only learning about it now, after our fiscal year has started and after all of our plans for those funds are in place."
School districts in Morgan County passed budgets last month.
The Morgan County Commission on Sept. 24 failed to pass a resolution that would have allowed distribution of the revenue as required by the local law.
“We’ve been told that the local bill is unconstitutional, and we’re going to follow this legal advice,” Commission Chairman Ray Long said last week.
Online sales taxes have generated about $1 million for Morgan County in the last 12 months.
Long and county attorney David Langston referred questions from The Decatur Daily to attorney Bill Justice of Columbiana, who represents the county in the case. Justice did not return a call Wednesday afternoon.
A statewide law mandates the collection of the 8% online sales tax for items delivered in Alabama. The state keeps 50% of the online revenue and splits 50% between county and city governments based on population.
Justice on Sept. 24 told commissioners the local law violated Section 105 of the state constitution, which deals with conflicts between state and local laws.
In an Aug. 7 opinion to Orr, John Treadwell, deputy director of the legislative legal division, said Section 105 creates a general rule that a local law is unconstitutional if it creates "a variance from provisions of general law. ... Generally, a local law may not conflict with the provisions of a general law."
Treadwell, however, concluded there was no conflict between the statewide law governing online sales taxes and the Orr-sponsored local law specific to Morgan County.
Because the statewide law does not specify or limit how money received by a county should be allocated, Treadwell wrote, Orr’s bill supplements the state law, rather than conflicting with it.
Even if a court determined there was a conflict, Treadwell wrote, several court rulings create exceptions to Section 105. One of those is that local laws can make material changes to a statewide law "to satisfy local conditions of which the Legislature is the sole judge.”
The complaint against the Morgan County Commission includes Treadwell's opinion as an exhibit.
Decatur City Schools
Superintendent Michael Douglas said Decatur City Schools did not join in the lawsuit because it plans to request Attorney General Steve Marshall to order the Morgan County Commission to abide by the local law, a procedure he had hoped would lead to a quicker resolution.
"Certainly we support what Hartselle's doing and agree with what they're doing; we were just going to take a different route," Douglas said. "We're in favor of getting the school children the sales tax money they deserve. Kudos to Hartselle."
Douglas said the first payment from the commission to the school districts is due Oct. 8.
"Starting Oct. 8, (Long is) clearly in violation of the law. An elected official can't choose which laws he wants to follow just because he can find one lawyer somewhere in the state to say the law is unconstitutional," Douglas said.
The superintendent said DCS has already budgeted the online sales tax money it expected to receive from the county.
"(Long) should have challenged the constitutionality of the law first, which he could have done way back in (May), but he chose to wait until we had already budgeted the money and a week before we're supposed to get it before he informed us, 'Well I'm not giving it to you.' "
The County Commission's refusal to distribute the money will have a significant impact on DCS even if the court eventually rules against the commission, Douglas said.
"We budgeted the money. That's how we paid for the growth in kindergarten. We hired new kindergarten teachers so we wouldn't have high class sizes. It's very frustrating that an elected official can just decide, 'Hey, I'm not going to follow the law because I don't like it.' If you or I did that, someone would come get us."
Douglas said it's not the first time the Morgan commission slighted schools on taxes they were owed.
In January, after being contacted about an underpayment to the Hartselle and Decatur school systems, Long said a "software glitch" caused the county to underpay sales taxes to DCS and Hartselle City by $1.1 million. The county ultimately repaid the school districts out of commission reserves.
"We told them there was an error in their accounting. They just mysteriously lost $600,000 or so of Decatur City Schools money, which we eventually got. Now less than a year later they're just withholding money that the law requires them to pay," Douglas said. "I think we may need to look at how our county collects taxes for schools. Maybe we need a third-party entity to distribute that money, because what we're doing is not working."
Morgan County Schools
Morgan County Superintendent Bill Hopkins Jr. said he has been out of town since Friday on school business, but was surprised Hartselle City filed the suit. Like Douglas, he said his school district expected to seek assistance from the attorney general before initiating litigation.
"I would think the attorney general would want to know there's a law not being obeyed in Morgan County," Hopkins said. "Hartselle City Schools suing has caught me off guard, because based on my last conversation with Dr. Jones, I did not know the school board intended to sue."
Orr, who sponsored the local bill at the request of the three superintendents in Morgan County, said he's glad Hartselle City filed suit.
"The whole matter is out of my hands," he said Wednesday. "It's up to the school districts how to approach it, but I support them taking the matter to the court system for a final resolution. I appreciate them doing that."
In a statement, the Alabama Education Association said it's critical that school systems be able to share in online sales taxes that they would receive if the taxes were collected in sales by brick-and-mortar retailers.
"As the online sales tax and its base grows, the traditional brick-and-mortar sales tax growth will slow until it eventually begins to decline ...," according to the statement.