A judge on Tuesday upheld the constitutionality of a local law and ruled that the bulk of online sales taxes received by the Morgan County Commission must be disbursed to the three school districts in the county.

The money involved is substantial. Just since Oct. 1, the state Department of Revenue has distributed five monthly payments to the County Commission totaling $722,053, which have been held in an escrow account managed by the Montgomery County Circuit Court. Absent the local law, the commission could have kept all of it.

The court ruled the commission is entitled to keep only the 5% allowed under the local law, or $36,103, with $675,661 to be divided among the school districts and $10,289 to be shared by volunteer fire departments in the county. The judge's ruling said the commission must distribute future online sales taxes in the same proportions, which are established by the local law.

The commission had refused to comply with the Morgan County-specific law, sponsored by Sen. Arthur Orr, R-Decatur, that required it to treat online sales tax revenue in the same way it treats brick-and-mortar sales taxes, arguing the local law was unconstitutional. 

Hartselle City Schools filed suit Oct. 1, the effective date of the local law, and Decatur City and Morgan County schools soon joined the lawsuit. In a Feb. 18 hearing before Montgomery County Circuit Judge James Anderson, the Morgan County Commission argued the local law was unconstitutional because it was inconsistent with the statewide Simplified Sellers Use Tax (SSUT) law that controls online sales tax collections.

On Tuesday, the judge rejected that argument.

Orr said the ruling was critical to the future of the county.

“If Morgan County is going to progress and grow, it’s got to have the strongest public education system that it can have,” Orr said Tuesday. “Traditionally, sales taxes have always gone to schools, and this money is important to our local schools.

“I would hope the commission would not appeal this case, but accept the judge’s ruling, give the fire departments and schools the sales tax money and move on. Otherwise both entities, the commission and the schools, will continue to pay the lawyers, and that doesn’t benefit anyone.”

Legal argument

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. The statewide SSUT law, which became mandatory for most online retailers Jan. 1, 2019, provides for an 8% online sales tax to be collected by the state, with a portion to be allocated “to each county in the state, (to be) deposited into the general fund of the respective county commission.”

The local law, however, requires the commission to redirect all but 5% of the online sales taxes it receives. It 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.

In its ruling Tuesday, the court relied on case law setting forth “the general rule that county funds belong to the state, such that the state — including the Legislature — can direct how they are allocated, distributed, spent, or otherwise used.”

The statewide SSUT law is not an exception to this general rule, the court decided, and the local law does not contradict the statewide law.

"The court concludes that the local act is fully within the Legislature's authority and does not violate Section 105," the judge wrote. "Therefore, the county commissioners must do as the local act requires."

The court ruled that the Montgomery County circuit clerk immediately disburse to the commission $46,392 of the amount in escrow, $10,289 of which the commission must forward to volunteer fire departments. He ordered the school districts, within three days, to instruct the clerk on how to divide the remaining $675,661 among the three districts.

In the future, according to the order, the County Commission must distribute SSUT revenue it receives from the state in accordance with the local law.

"This is great for all the students in Morgan County," said Hartselle City Superintendent Dee Dee Jones, the lead plaintiff in the lawsuit that was coordinated by the Alabama Education Association. "We'll be able to offer additional instructional opportunities. We'll be able to plan and provide for the future of our students in Morgan County."

New school possible

Jones said the local law and the lawsuit enforcing it were necessary because online sales continue to increase relative to brick-and-mortar sales.

“We needed those funds for our students. It’s going to help continue programs and possibly help us to build a new elementary school in Hartselle,” Jones said.

Morgan County Commission Chairman Ray Long did not return a call Tuesday evening.

Morgan County Commissioner Jeff Clark did not know whether the commission would appeal the ruling. If the ruling stands, he said it would complicate the county's ability to provide services beyond those mandated by state law.

"We're going to do the best we can with what we have. We're going to still try to do the things we're required to do, as far as keeping roads and rights of way safe, but we may have to do it with less people," Clark said. "We'll just have to task people to do more with less. Some of the things we wanted to do, we may have to scale back."

He said the county would likely have to limit major in-kind projects for schools.

"We're going to have to pick and choose what we can do," Clark said. “We did the site prep for Priceville Elementary School and in-kind service on that job was about $600,000. Now I’m not sure we would be able to do jobs of that scope. As far as stepping out and doing big projects, I don’t know that we’ll be able to.”

Morgan County Schools Superintendent Bill Hopkins Jr. said his hope and expectation is that the County Commission will continue to assist the schools. He said the gradual replacement of brick-and-mortar sales by online sales has hurt the schools. He said the County Commission, which before the SSUT law had not benefited from sales taxes, received a windfall when it began receiving online sales tax revenue.

“I don’t see where any in-kind services should change, because the fact is it was a new source of funding to them; it’s not a new source to us. But, if that is the way they wish to do things, I will respect that and I will leave that up to the voters of Morgan County,” Hopkins said.

Before the local law took effect Oct. 1, the County Commission received and kept $852,083 in SSUT funds in 2019, according to Department of Revenue records.

Decatur City Schools Superintendent Michael Douglas said DCS had already budgeted the online sales tax money when the County Commission declined to obey the local law, in what he described as “a money grab.”

“Sales tax has always gone to the schools, always gone to kids,” Douglas said. “My hope is the County Commission will quit wasting people’s time. Let’s get this money into the hands of these three school systems so we can spend it on our children.”

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eric@decaturdaily.com or 256-340-2435. Twitter @DD_Fleischauer.

(3) comments

Jesse Hockett

The local law that changed the distribution of the online sales tax went into effect October 1st.

Under the new local law distribution of funds to the schools was due by October 31st.

Hartselle City Schools and the AEA filed a lawsuit on October 1st (30 days before distribution was required).

The Morgan county commission still had time to distribute the online sales tax funds to the schools when a judge ordered them not to because of the lawsuit.

Another important fact in the case is that Montgomery County Circuit Judge James Anderson is a Democrat who represented the AEA before he was appointed to the Montgomery County Circuit Court in 2014. https://www.montgomeryadvertiser.com/story/news/politics/southunionstreet/2014/09/05/james-anderson-appointed-special-circuit-court-judge/15150873/

Charlie Specoli

First and foremost the commission and it's chairman violated their oath of office and CHOSE to violate the law. Instead of doing the right thing, which is what we elect them to do and to honor their oath of office and distributing the money as the law mandated and then filing a lawsuit they chose to do the wrong thing. Before the ruling of the judge and now since the judge hasn't ruled in the commission's favor, they contend that they can't afford to do in kind services, and may have to do more with less employees. Yet they have done this very thing with the current staff of employees and didn't have this money to start with and performed these services. They are currently operating with a budget that does not include these funds, yet they want us to think that it is dire straits when it really is not. Recently the commission chairman used his state of the county speech to state why this money should go to the county commission only, yet he was bragging about a five million dollar reserve and that the county was in the best financial shape ever. All off which was accomplished without internet sales tax. So Mr. Commissioners and Mr. Chairman we aren't all as stupid as you might think, or hope. You never had this money and have done fine, stop with the gloom and doom rhetoric and stop being sore losers in this court battle. Last re-examine your oaths, and do the right thing and comply with any future law that all of you may disagree with, we as citizens have to, and so do you.

Jesse Hockett

According to the information provided in The Voice of Morgan County March Edition (page 2), the county commission had been using money from the Simplified Sellers Use Tax (SSUT) to fund county expenditures since 2015. The new local law prescribing that 95% of the SSUT revenue had to be distributed to the schools and volunteer fire departments will have an impact on the county budget because thoise funds had already been programmed into the budget for years. http://www.co.morgan.al.us/community/newsletters/TheVoice_Mar2020/mobile/index.html#p=13

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