The coronavirus pandemic intensified the surge in e-commerce as shopping malls and other stores shuttered for a period during strict stay-at-home orders.
The pandemic, if anything, kept consumers confined to their computers and delivery services like UPS and FedEx busy. Online mega-retailer Amazon netted $5.2 billion in profits between April and June.
The rising activity is also proving to be a “life saver” for Alabama’s municipal governments and a “financial vaccine for Alabama’s counties” during a budget season that, in some cases, looks bleak. Without a way to tax online sales, jobs would be cut and services – like garbage pick-up and firefighter – would likely be reduced compared to years past.
“It has been the bridge that has allowed county governments to survive the last six months,” said Sonny Brasfield, executive director with the Association of County Commissions of Alabama.
Alabama’s online sales tax program has a wonky phrase — “Simplified Sellers Use Tax.” In essence, the relatively new program is an 8 percent statewide flat tax on online sales, and it has grown in dramatic fashion. This year alone, it represents – by far — the strongest year-over-year revenue growth within the accounting books at City Halls and county government revenue offices throughout the state.
According to the latest state revenue figures, the program has raked in over $309 million overall during the current fiscal year which doesn’t end until September 30. That number represents a 99% increase from the $155.1 million the tax generated during all of fiscal year 2018-19.
According to the Alabama League of Municipalities, cities are on target to get around $90 million this year.
Cities are seeing a start spike in revenues within the past two years: Madison has seen its SSUT revenues jump 88% since last fiscal year, and 407% in two years; Tuscaloosa’s SSUT collections jumped 68% since last fiscal year, and 451% since two years ago; and Dothan’s SSUT tax has brought in 87.5% more in one year, 407% in two.
Birmingham, which has seen its overall revenues drop by 20% because a loss of overall sales and occupational use taxes during the Covid-19 pandemic, is enjoying a 132% bump in its SSUT.
Hoover, home to the state’s largest indoor mall – the Riverchase Galleria – saw its overall sales tax collection dip by $560,000 from July 2019 compared to July 2020. But it the online sales taxes the city gets has shot up 125% within the past year.
City officials credit some of the bump to changing consumer behaviors during the pandemic, which shifted to more purchasing online. But they also credit a political change that occurred during the waning hours of the 2018 legislative session, which boosted the amount of money cities get through a change in the distribution formula that had been established when the SSUT program first rolled out in 2016.
In addition, there have been growing numbers of on-line retailers in the program – from fewer than 200 in 2017, to 1,300 in 2019, and over 2,900 today.
Under the SSUT formula, 50 percent of all revenues from online sales from companies participating in the program go to the state. Of that amount, 75% goes to the state’s General Fund, and another 25% goes into the state’s Education Fund.
The remaining 50% has been part of a city-county tug-o-war in recent years. Before Jan. 1, 2019, the money was split evenly between city and county governments. But at the end of the 2018 legislative session, state lawmakers approved to a new formula in which 60% goes to cities, while 40% goes to the counties. The money collected for cities is then distributed to individual municipal governments based on population size.
The legislation also expanded the program to allow out-of-state online sellers to join the SSUT even if they have an affiliate with a brick-and-mortar presence in Alabama. Before that, such sellers were barred from the SSUT by an “affiliated nexus” provision.
Despite the changes that has led to a rise in revenues, cities remain unsatisfied. They also say that the SSUT program remains unfairly structured, and that larger municipalities should be getting even more revenues to pay for police cars, dump trucks and new roads or sidewalks.
Paul Wesch, the chief of staff to Mobile Mayor Sandy Stimpson and a leading advocate for cities in the battle over SSUT appropriations, said the percentage that Mobile gets from SSUT is 2.86% as opposed to 5% that they would otherwise get through the city’s regular sales tax collection. The sales tax in Mobile is 10%, of which 5% is Mobile’s sales tax rate – while the SSUT is 8%, of which a smaller portion goes back to the city.
“At first blush, when you look at SSUT, year-to-year, it looks great and the number is going up,” said Wesch. “But another way of looking at that, if our overall SSUT does come in during 2021 at $9.3 million, if you do the math … if it was (taxed) at 5%, it would not be double but close to double that amount. We are not gaining $9.3 million, but we are losing $7.5 and $8 million.”
Wesch also said that the SSUT legislation from 2018 “glosses over the fact that 40% of taxable retail sales are business to business sales. Almost all of those are occurring with purchasers within city limits.”
Brasfield, who butted heads with Wesch and other city leaders in advocating for the counties over the prior SSUT changes, said that cities opposed changes to the program that included revenues from third-party Internet sellers – those sites that sell both their own products as well as products from other revenues.
“Ultimately, only a couple of hours before the 2018 session ended, we agreed to split the local revenue 60-40 in exchange for the expansion of the program to include these additional vendors,” said Brasfield. “The split of the local revenues now aligns pretty well with the distribution of Alabama’s population within and outside municipal limits.”
He added, “Clearly, the changes have grown the SSUT and we were very wise to make the changes in 2018.”
City officials in Huntsville and Tuscaloosa agree with Wesch’s take, and a group of city leaders are expected to push for more changes to the SSUT in future legislative sessions in an ongoing effort to slice off more of the pie for city governments.
“The fact that mom and pop consumers are changing behavior is important to this calculus, but we have this underling issue that 40% of the purchases are business to business and we are getting the short end of the stick,” said Wesch, providing an example of telecommunication equipment that is purchased by cities, as opposed from the counties, from out-of-state vendors. “The tax on those items are disproportionately enriching counties and smaller cities that don’t have those purchases. It’s Birmingham and Montgomery and the mid-sized cities with a lot of industry and businesses where those larger ticket items are purchased.”
Huntsville Mayor Tommy Battle believes the existing 60-40 formula still needs changing, noting that a lion share of retail economic activity is occurring within the largest metropolitan cities than in the counties, many of which are rural in Alabama.
“More than ever, cities should be receiving their fair share of the local sales tax collected from online sales,” Battle said. “A percentage of a percentage of taxes based upon population is not going to fund our roads and community needs.”
Said Tuscaloosa Mayor Walt Maddox, “SSUT has played a key role in partially recouping the loss of sales taxes. Although it is still less than what it should, it is no doubt a welcome source of revenue. Hopefully, in the future, we can continue to move SSUT closer to the actual point of sale.”
In cities with heavy commercial activities and malls, like Foley, the SSUT also represents only a tiny fraction of the city’s overall sales taxes. In the past two years, Foley has collected over $700,000 from the SSUT, which represents only 2.3% of the city’s overall sales tax revenue of $27.3 million over that same time.
“I do not believe brick and mortar sales are going away because some things people want to see and touch before buying and frankly, shopping is a form of entertainment that many people enjoy,” said Foley City Administrator Mike Thompson. “But I do think online retail will continue to be a growing portion of the overall sales tax revenue for local governments as more businesses go exclusively virtual, in place of brick and mortar, and more people become comfortable with that form of shopping.”
Online sales shot up over 70% globally during the second quarter of 2020, as the coronavirus pandemic kept people shopping on their computers during the spring months.
“Once people get used to the convenience of online sales, and the prices online are competitive, this trend will continue to grow and, if nothing else, this Covid-19 pandemic has acted as a catalyst for more people to consider an online channel as a vital substitute,” said Rafay Ishfaq, an associate professor of supply chain management at Auburn University.
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