Morgan County is the focus of statewide attention as COVID-19 has resulted in a sharp increase in online sales tax revenue, little of which goes to schools in most of the state, and a drop in the brick-and-mortar tax revenue that largely supports public education.
The Morgan County Commission is unique in that a local law requires that it distribute the bulk of online sales tax revenue to school systems within the county, although the commission is attempting to overturn that law in court.
Local school officials say the online sales tax is especially important as they confront expenditures involved in reopening schools next month during a pandemic.
Only a fraction of the Simplified Sellers and Use Tax, created by lawmakers to tax online sales in 2015, 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 brick-and-mortar stores, was down 12.36%.
While any revenue growth, especially during a pandemic, is generally 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,” said Ryan Hollingsworth, executive director of School Superintendents of Alabama. “However, by Alabama defining online sales tax as a ‘use tax’, online sales tax is not considered sales tax.”
Online sales up
And while tax collection at physical locations still far outpaces online retail, sales tax is down about 0.5% year-over-year. The SSUT collection has about doubled.
The city of Decatur, which does not share online sales taxes with the school system, received $202,520 from the state last month, up from $109,584 in June 2019. The Morgan County Commission received $175,110 in online sales tax from the state in June, up from $94,752 in June 2019. Because of the local law, the commission had to distribute all but 5% of that amount to schools, plus a small amount to volunteer fire departments.
“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.”
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 changes).”
He also said 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 Educational Trust Fund (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.”
In 2019, at the request of local school leaders, state 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 said. “At the end of the day, the internet sales taxes are coming at the expense of school children.”
Hartselle City Schools' chief financial officer Bradley Colburn said the local law helps account for the fact that more people are doing their shopping online.
"Really, all we're asking is that there not be a difference between whether an item was sold in a store or sold online," Colburn said. "All we're asking for is this money to be distributed as if it was bought in the store."
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 joined 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 said last week. “It doesn’t just affect Morgan County.”
Long said 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 and 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.
Morgan County Schools' chief financial officer Brian Bishop said although COVID-19 has accelerated a shift in sales from brick-and-mortar stores to online, the trend will continue long after the COVID-19 pandemic ceases due to the convenience online shopping provides.
"Over the next 10 to 15 years, that trend is just going to continue to increase, so I think you're going to see an erosion of the sales tax that funds school boards," Bishop said. "So that's why we feel it's important that we get some relief now, because this trend's just going to continue to snowball."
Local school systems are keeping the SSUT money out of their operational budgets until the litigation with the county is resolved.
Bishop said school budgets are particularly tight now, as districts are purchasing virtual learning materials and personal protective equipment in preparation for reopening in August.
"Not just Morgan County schools but every school in the state is having to spend money to try and get ready, because kids are coming back in August and we've got to be ready to meet those needs," he said.
Colburn said that although the state contributes a substantial amount to Hartselle City Schools, they need additional funds to ensure that the district is prepared to reopen in August on top of paying for building maintenance and other expenses.
"A lot of times people don't understand that the state funds a lot, but 95% of that money goes to salary," he said. "We're spending hundreds of thousands of dollars in preparation for what the next school year's going to look like, that if we had these excess dollars from online would help us absorb some of that cost."
Colburn said the district spent about $250,000 on Chromebooks for students and is working on other measures to keep students safe when school resumes next month.
Bishop said the increases in SSUT collection, both from the January changes to how the tax is collected and the impact from COVID-19, have raised the stakes of the lawsuit's outcome.
"That's why it got contentious and the commission wanted to keep the money and our delegates were insistent that the schools get it," he said. "I do understand that there are other districts that are getting ready to file their own local acts statewide."
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 (sales tax) or share that with the school districts,” Hollingsworth said. He said in some counties, those conversations are happening.
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 Brasfield 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.