Morgan County tax dispute will have statewide impact

Morgan County tax dispute will have statewide impact

By TODD STACY and ERIC FLEISCHAUER

MONTGOMERY — The Morgan County Commission and the county’s school districts went head-to-head in a Montgomery County Circuit Court hearing on Tuesday in their fight over who should receive online sales taxes, and now they must await a decision from the judge.

As they wait, the stakes continue to rise in their tussle over whether a local law was effective in prying money from the County Commission’s general fund and distributing the bulk of it to the three public school systems in the county. On Monday, the commission sent the largest monthly installment yet of online sales taxes it received from the state to a court-supervised escrow account: $217,037.57. The amount exceeded the next highest payment, in January, by more than $73,000.

That brings the five-month total in the escrow account to $722,053.27. The first monthly payment was turned over to the court in October. The local law took effect Oct. 1, and Hartselle City Schools filed suit the same day. The County Commission had previously refused to vote on a resolution disbursing the online sales tax to the schools, arguing the local law was unconstitutional. Decatur City and Morgan County schools have since joined with Hartselle City in the lawsuit.

The crux of the legal dispute is whether the local law, sponsored by state Sen. Arthur Orr, R-Decatur, conflicts with the statewide Simplified Sellers Use Tax (SSUT) law. Under Section 105 of the Alabama Constitution, a local law can supplement a statewide law but not contradict it. The statewide law took effect as a voluntary 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.

Attorney Bobby Segall, representing the Alabama Education Association, which is assisting the school districts, argued in court Tuesday that the local law directing the online sales tax revenue to schools was not in conflict with the original statewide law allocating the tax revenue to county general funds. He said the revenues are generated by the state and the Legislature has the authority to further allocate them. Also, he argued the statewide law did not specify how the money should be spent or prohibit additional legislation from being enacted to further direct its allocation.

“What the (county commissioners) are asking you to do in this case is outright revolutionary, it is unheard of, it is entirely without authority, and it runs against the tide of Alabama Supreme Court case law. It’s important to note, your honor, that the law in Alabama for generations has been that county funds are state funds, subject to the state’s control.

“The Legislature for decades has passed local laws directing how state tax revenues are to be spent.”

Dorman Walker, attorney for the Morgan County Commission, argued the local law runs afoul of the state Constitution’s prohibition of local laws conflicting with state law. He said the statewide SSUT law, updated in 2019, already directs how to spend the money by directing it to counties’ general funds.

“Our position is that the Legislature has told the County Commission, by general law, how to spend the money. And because of Section 105 (of the Constitution), it can’t come now and tell Morgan County by local law to spend it some way differently. … It was an affirmative policy choice by the Legislature that the funds were under the control of the County Commission.”

The statewide SSUT law provides for an 8% online sales tax to be collected by the state, with half allocated to the state General Fund and the Education Trust Fund. The other half is to be allocated to municipalities and the counties. The statewide law allocates a portion of the local half “to each county in the state, (to be) deposited into the general fund of the respective county commission.”

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

The local law 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 mimics how the county divides sales tax collections from brick-and-mortar stores.

Montgomery Circuit Judge James Anderson heard an hour and a half of arguments from lawyers on both sides Tuesday and asked several questions. At one point, Anderson acknowledged his decision in the case would have a statewide impact. He also acknowledged that, whichever way he ruled, the decision would likely be appealed to higher courts.

“That’s why we’re all here,” Anderson told the attorneys. “If this is constitutional, what is there to prevent other counties from doing the same thing? This is just the first county that has attempted this.”

Walker agreed, saying more school boards would seek similar local legislation.

“Your honor, there is a floodgate waiting to open and school boards around the state will be raiding SSUT proceeds and they’ll find other ways to get other proceeds,” Walker said.

No ruling was issued from the bench. Anderson gave the attorneys two weeks to submit their own proposed rulings for his consideration.

Theron Stokes, associate executive director of the Alabama Education Association, which is assisting the school districts in the litigation, said he thought the hearing went well.

“What was interesting was how the defendants said that if the court rules this case constitutional, it would ‘open up the floodgates’ for other school boards from around the state to do the same, as if that was something negative. Schools in the state of Alabama need money to be able to educate our population,” Stokes said.