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By NOAH WORTHAM | Managing Editor

On a hot summer day, while not wanting to have to travel on the busy roads, one Alabaster resident places an order for a quick DoorDash delivery to their home from a local business in the city.

After paying for their order through the app and leaving a tip, the customer eventually receives their order at the door and enjoys their food. Meanwhile, another Alabaster resident travels to the same local business and grabs their food to-go and heads home.

Despite ordering from the same business in the same city, both residents paid a completely different tax rate. This situation is happening in every city across the state and is due to Alabama’s Simplified Sellers Use Tax Remittance Act, which sets all participating online sales at a flat 8 percent rate no matter where the online order is placed.

While the act was originally meant to encourage online sales vendors to come to the state of Alabama, it has also had a profound effect on the budgets of local municipalities, with cities featuring large retail presences potentially losing out on $1 million-plus a year while smaller municipalities enjoy a positive stream of revenue.

“Yes, it’s easy and it’s simple, but it takes away the nuance of different cities needing different things,” Alabaster Finance Director John Haggard said.

Digital dollars

In order to encourage large-scale online businesses to come to Alabama, state lawmakers passed the Simplified Sellers Use Tax Remittance Act in 2015. The act allowed eligible sellers to sell their goods or services in Alabama from a location outside of the state with an easily-accessible method to collect tax on sales made.

“There was no federal mandate that you had to pay sales tax on online transactions, so we, along with other states, implemented these types of programs, like the SSUT, to entice organizations like Amazon,” Haggard said.

This encouraged large online retailers to bring their services to Alabama, which pleased consumers who desired to purchase their goods and also allowed the state to collect taxes on services which it did not previously receive revenue from.

The act was later amended in 2017 so that SSUT program participants can remain only as long as the seller doesn’t establish a nexus—a physical location in the state—or affiliate with another business in the state that has a physical presence. In 2018, the act was further amended so that participants in the program would be required to collect and remit SSUTs on all marketplace sales.

Due to the way the SSUT program is currently written through legislation, the 8 percent flat tax applies to all sales regardless of the locality the product or service was delivered to in Alabama.

The tax is divided up with approximately 4 percent given to the state with the remaining approximate 4 percent distributed between local government. The state distributes its earnings with 1 percent for the Education Trust Fund and 3 percent for the General Fund. Counties receive about 1.6 percent of the SSUT earnings and municipalities receive 2.4 percent.

The hidden cost

While many smaller municipalities find themselves content with a new source of tax revenue, other larger municipalities with a significant retail presence have expressed concern over the current structure of the SSUT which effectively leads to a loss of tax revenue for the city.

“When you factor in the amount of money we get from our local sales tax and the amount of money we get from SSUT—and you factor in for things like inflation and growth—the joint pot of money that we’re receiving is not keeping up with where it would be if everything had just stayed the way it was,” Haggard said. “We’re getting less money net between the two sources added together than we would have gotten.”

The city of Alabaster operates on a 10-cent sales tax with four cents going to the state, one for the county and five for the city. On the other hand, the SSUT sees the city receive a fraction of a penny from online sales due to the current structure basing distribution off of city population and not where the good or service was delivered.

“The state doesn’t care that our local rate is (10) but they’re only charging eight total,” Haggard said. “They’re getting their four cents here and their four cents there.”

Haggard has seen firsthand how the current structure has cut into the city’s revenues, and he’s not alone as Chelsea and Calera have noticed a negative effect on their finances as well.

“We think the city’s losing about a million dollars a year because of the SSUT system,” Chelsea Finance Director Wayne Barber said.

The city of Chelsea has a 10-cent sales tax like Alabaster, which means the current system sees the municipality losing out on those 2 cents in taxes.

“If you take someone like Kroger delivery, they would normally pay in the city up to 5 percent sales tax, where now we’re only collecting about 2-3 percent of it,” Barber said. “So, we’re losing a good share of money there.”

While the city of Calera operates on a 9-cent sales tax, according to Finance Director Kelly Ellison, the city has seen an overall decrease in sales tax revenue.

“Our sales tax revenue collected in 2024 was less than 2023, which directly relates to the SSUT,” Ellison said. “In 2024, the city of Calera collected $1.3 million in SSUT, but based on our analysis, had the sales tax been collected in the traditional taxation methodology, the city would have received an additional $1.6 million.”

Additional yearly revenue allows cities like Chelsea, Calera and Alabaster to distribute those funds towards operating costs and completing projects and services for residents that live in their zoning.

“Calera has a 4 percent city tax rate, so if you buy $150 in groceries from Sav More in Calera, you will pay $6 in local taxes that go directly to our general fund to be used for city services and infrastructure,” Ellison said. “But if you buy those groceries from Kroger, you pay an 8 percent flat tax—that money is dispersed by populations around the state of Alabama and Calera only receives two pennies from that transaction. So anytime someone moves from shopping at Sav More, Walmart or Publix to Kroger, it directly reduces our revenue by that much.”

Due to the types of businesses that are allowed to qualify under the SSUT system, it’s possible for different residents to purchase services from the exact same establishment in the same city but pay different tax rates.

“If you go to Chick-fil-A in Calera, you’ll pay 4 percent in taxes to the city of Calera,” Ellison said. “But if you order through DoorDash… even though you went through a local business to fill the order, a local driver delivered the order and they delivered on our roads—we don’t receive any sales tax.”

The current SSUT structure also impacts consumers as well as brick-and-mortar businesses, which rely on a steady stream of customers.

Due to this tax structure, consumers are incentivized to shop online since often times the amount of taxes paid are less at 8 cents as opposed to 9 or 10 cents, which would be the rate in many cities. This doesn’t apply to unincorporated areas such as North Shelby, where residents end up paying more for online sales than they would at a brick-and-mortar location since the SSUT flat rate is higher than the local rate.

Price of education

The current SSUT system also directly adversely affects the amount of funding that state schools receive and some city schools receive.

Alabaster, Pelham and Chelsea each have 1 percent of their sales taxes generated set aside to support local schools. Since the SSUT system potentially reduces the amount of sales tax revenue cities receive, it also impacts the money local schools can put toward programs and infrastructure.

“We’re losing about 2 cents total, and of that 2 cents, 1 cent of it would be education, so around $580,000 a year is what we estimate it to be that would normally go back to the education fund,” Barber said.

Out of its 10-cent city sales tax, the city of Alabaster has set aside 1 cent on every dollar spent in the city to go toward Alabaster City Schools, which is funding the school system relies on and accounts for in its budgeting process.

“For the first 10 years that we funded the school sytem, ever single year the amount of money we sent to the school system was higher than the year before,” Haggard said. “Last year was the first year that number went down.”

Additionally, the distribution of the SSUT tax has a narrower amount set aside for the state’s Education Trust Fund than in the city sales tax system.

“So, for a purchase in a city, like if you were to go to Walmart Supercenter and spend $100 on something then the city school system is going to get $1 of tax passed through us, the state Education Trust Fund is going to get $2.08 of tax—that’s $3.08 for education across state and local sources,” Haggard said.

However, through the current SSUT system, Alabaster City Schools would receive a diminished amount to no funding in this scenario and the state Education Trust Fund would receive approximately $1.

When writing the current SSUT distribution, lawmakers set it so that, of the state’s four cents, approximately 1 cent goes toward the Education Trust Fund and 3 cents go toward the state General Fund.

“I think the biggest loser in this new system is schools and education,” Haggard said.

An opposing perspective

While some local municipalities have begun to rally for change to the current SSUT system, there are also some municipalities which support the current structure, which is advantageous depending on the circumstances.

Columbiana Mayor David Mitchell has been a vocal proponent of the current system and shared how it helps the city of Columbiana grow.

“Their concern is that they’re losing sale tax revenue,” Mitchell said. “People used to shop at their big boxes and now they’re doing it online and it is being distributed by the population of your municipality. My issue is that the larger cities are on major transportation hubs and they have a whole lot of retail. Columbiana doesn’t have a major transportation corridor like I-65, 280 or anything like that and our people go to their towns to shop because we don’t have those retail businesses here in Columbiana.”

Mitchell said that Columbiana has several businesses that are internet-based and asked why the city shouldn’t receive sales tax revenue from those sales.

“Why shouldn’t our people, who in the past had to do all their shopping someplace else, now go online and shop,” Mitchell said. “Why shouldn’t Columbiana get the sales tax that our residents are paying?”

Since a portion of the Simplified Sellers Use Tax is distributed to cities by population and is not based on the destination of the good or service, many smaller municipalities benefit from the flow of revenue from the SSUT system.

According to the Alabama League of Municipalities, the state of Alabama contains 465 municipalities and of those, approximately 406 have populations under 12,000.

“So, there are very, very few larger municipalities that are really impacted by (SSUT),” Mitchell said. “Some of these municipalities are even smaller than Columbiana and they’re in much more rural areas, and they would be much more harmed by the changing of the SSUT law than even Columbiana would be.”

Shopping for a solution

On Monday, April 7, Tuscaloosa Mayor Walt Maddox hosted a summit on the SSUT issue and invited more than 50 mayors from across the state to discuss the issue.

During the summit, Maddox and fellow mayors, discussed the issues with the current SSUT system, outlining how it was affecting several large municipalities, including Tuscaloosa, Northport, Mobile, Huntsville, Dothan, Decatur, Birmingham, Auburn, Madison, Hoover and Montgomery.

As part of the summit, Maddox presented Destination Sourcing as a possible solution to the issue which would change online sales to be based on the location of where the buyer takes possession of the item sold.

Destination Sourcing would fix the fiscal losses that certain major municipalities are experiencing through the SSUT system, however, any smaller municipalities that were benefitting from the population distribution could see a decrease in funding.

“Mayor Maddox in Tuscaloosa is trying to start a grassroots movement through all the local municipalities to force the state to take another look at how their allocation is structured—knowing that we can’t rip the Band Aid off because, for a city like Columbiana, they have probably allocated those funds,” Alabaster Mayor Scott Brakefield said. “You can’t just go ahead and rip it all away and restart.”

Another proposal to the issue would be to increase the overall SSUT rate to 9.25 percent as suggested by dead House Bill 36 in February 2025—sponsored by Rep. Chris England, D-Tuscaloosa.

Lawmakers and representatives are continuing to look at the issue as it continues to positively and negatively impact municipalities around the state and as online shopping continues to grow.

“Shopping online is never going to go away,” Brakefield said. “More and more people are going to shop online.”