The mayors of Alabama’s five largest cities and the state’s influential county commission association are again headed for a showdown over online retail taxes. The arena will be the chambers of the 2019 Legislature.
The key issue is dueling interpretations of the state’s 8 percent flat tax on online sales: the Simplified Sellers Use Tax – SSUT, for short.
The SSUT program is exploded in importance to the state Treasury. Two years ago, 166 retailers were participating, voluntarily collecting the 8 percent tax from customers. Now, more than 1,300 retailers are signed on.
And the revenues pile higher: The collections hit $80.2 million in fiscal 2018, up from $52.4 million a year earlier. The state’s fiscal year runs from Oct. 1 to Sept. 30.
During a Thursday news conference in Montgomery, the mayors of Alabama’s largest cities sought to seize the initiative in pitching their case: Absolutely, under no circumstance, should lawmakers endorse a pending bill that could siphon online sales tax revenues from their coffers.
“In our opinion, it doesn’t do justice for the economic engines in our state,” said Tuscaloosa Mayor Walt Maddox.
Added Huntsville Mayor Tommy Battle: “We all came together and said this is a collaboration to make sure we bring fairness back to our citizens. As long as we, the larger cities, are successful, we will continue to help grow the whole state.”
‘Extremely harmful’
The concerns from the so-called “Big 5” mayors – representing Birmingham, Huntsville, Mobile, Tuscaloosa and Montgomery – revolve around HB418, sponsored by Rep. Rod Scott, D-Fairfield.
Under the bill, out-of-state online sellers could join SSUT even if they have an affiliate with a brick-and-mortar presence in Alabama. At present, such sellers are barred from SSUT by an “affiliated nexus” provision.
The mayors warn that mega-retailers, such as Walmart, that have long collected a regular state-and-local sales tax, will opt to participate in SSUT instead. In Mobile, the combined sales tax is 10 percent; that’s two percentage points higher than the SSUT’s flat rate.
Moreover, according to city leaders, the SSUT remits back to cities a much smaller share, almost 3 percent, than the standard sales tax’s 5 percent.
“Every dollar that migrates from paying at the local jurisdictional rate through SSUT is extremely harmful,” said Paul Wesch, the chief of staff to Mobile Mayor Sandy Stimpson.
He estimates that for every $1 million migrating into the SSUT program, the city could lose $450,000 in taxes.
Maddox labeled HB418 as a “tax break” for out-of-state corporations.
“We need to make certain that where those points of sale are occurring, they come back to use as fair as possible,” he said.
‘Ripe for challenge’
On the other side of the debate is Sonny Brasfield, the executive director of the Association of County Commissions of Alabama who has worked on the Internet sales tax quandary since the early 1990s.
Brasfield dispute’s Wesch’s claims about the possible losses. And he said that the “affiliated nexus” provision could soon be tossed out by the courts anyway.
The U.S. Supreme Court, in its January ruling in the Wayfair vs. South Dakota case, bolstered states’ abilities to collect taxes on online sales. That 5-4 ruling is seen a landmark in defining tax powers in the digital era.
“Our affiliated nexus statute is ripe for challenge,” said Brasfield. “It would be reckless for us to continue to try to enforce a statute that is out of step with the U.S. Supreme Court simply because a few jurisdictions want to cling to an out-of-date system.”
He is urging lawmakers to do away with a system that treats out-of-state companies differently because they “somehow are related to a company that is in Alabama.”
Wesch has a different viewpoint on the Wayfair decision, and disputes Brasfield’s claim that it threatens state law.
“It does the opposite,” he said. “It strengthens the legal foundation for requiring companies related to in-state companies to collect sales tax. Wayfair makes collecting sales tax from out-of-state sellers easier, not harder.”
Wesch said he agrees with Brasfield that SSUT was a creative response to online commerce, but added that inequities exist and that HB418 is not a fix.
“Equitable and responsible tax collection is a serious problem that requires well-structured, deliberate solutions,” said Wesch. “Not HB418’s Band-Aid fix.”
Tax increase
The bill also does something else, which is not at the heart of the city-county dispute: It potentially raises a tax.
Under the proposal, the flat 8 percent tax under Alabama’s SSUT could be increased by 1 percentage point.
HB418 instructs the Alabama Department of Revenue, for SSUT purposes, to average out the combined local and county sales tax rates and add that rate onto the state’s 4 percent rate. The new rate would be capped at 9 percent.
A note tacked onto the bill estimates the new rate would generate $19.7 million in new revenues to counties and municipalities.
Brasfield said the reason for this change is to answer the concerns raised by brick-and-mortar retailers. “The retail community and others have complained about SSUT and I think rightly so,” he said. “The average sales tax rate in Alabama, even averaging in those jurisdictions where there is no local county and city tax, is almost 9 percent.”
The Alabama Retail Association, initially neutral on HB418, is tossing its support behind it. The bill recently passed the Alabama House Ways and Means Committee, and awaits a full debate on the House floor.
“We believe it gets our state one step closer to ending the unfair tax advantage out-of-state, online-only businesses have over our local businesses,” said Melissa Johnson Warnke, a spokeswoman with the association. “We have long advocated for online-only and remote sellers to have to play by the same rules as our Alabama-based retailers. The 1 percent rate adjustment, from 8 percent to 9 percent, further levels the playing field.”