Ruling on Morgan County online sales tax money celebrated by education groups

By MARY SELL, Alabama Daily News

A recent Alabama Supreme Court ruling will mean millions of dollars in online sales tax revenue for Morgan County schools and is a win for schools statewide, supporters say.

Some expect more local legislation similar to the north Alabama county’s in the next legislative session.

The court earlier this month upheld the constitutionality of a 2019 local law by Sen. Arthur Orr that directed the bulk of revenue from online sales tax, referred to as SSUT, received by the county commission to the county’s public schools.

Orr said the local bill mirrored that of the county’s existing bricks-and-mortar sales tax distribution — revenue that has dipped as more people shop online.

“In Morgan County, the internet sales tax money was really coming at the expense of the school children’s money,” Orr said recently.

He said he expects to see other lawmakers file similar bills, if their counties have similar sales tax distributions.

Ryan Hollingsworth, executive director of School Superintendents of Alabama, agreed.

“The SSUT collected in April of 2021 was up 71.77% compared to April of 2020,” Hollingsworth said. “The SSUT continues to grow at a much faster pace than regular sales tax collected at brick and mortar stores.  It is obvious that people are making more and more online purchases and this will negatively impact the collection of sales tax at the local level that are being used to fund local schools.”

Traditional sales tax revenue was up 38.16% in April.

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.

Shortly before the Oct. 1, 2019, effective date of the law, the commission failed to pass a resolution that would have allowed distribution of the revenue as required, The Decatur Daily reported.

According to the Daily, Hartselle City Schools filed suit against the County Commission as soon as the law took effect, and Morgan County Schools and Decatur City Schools joined in the lawsuit later in October 2019. The Alabama Education Association assisted the school systems with the litigation.

The Montgomery County Circuit Court ruled in March 2020 that commissioners “must do as the local act requires,” but the commission appealed to the state Supreme Court.

In a statement to Alabama Daily News, the AEA said the case was always about the future of school funding in Alabama.

“The school systems in Morgan County will be receiving greatly needed revenue as a result of this Supreme Court ruling, which will allow them to, not only maintain their excellent school systems, but be able to provide the necessary innovative programs that will make them exceptional school systems,” the statement said. “Online sales tax is the funding source of the future as traditional public education funding through brick-and-mortar sales has shifted and online sales have taken over a larger share of market activity. Friday’s victory was a massive victory in the future of Alabama public education, it shows that Alabama’s education funding can be modernized and will be modernized so our students can succeed.”

The Morgan County Commission’s legal defense focused on Section 105 of the Alabama Constitution, which generally prohibits a local law from contradicting a statewide law, the Daily reported. The statewide Simplified Sellers Use Tax (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, specifies a formula for redirecting the money remaining after the commission keeps 5%. Volunteer fire departments receive 1.5% of the remaining funds, and the three public school systems in the county share the rest. The bill’s formula divides the online sales taxes in roughly the same way brick-and-mortar sales taxes are divided.

The Supreme Court held that the local law did not conflict with the statewide SSUT law.

“Instead, it tells Morgan County that it must spend certain moneys already deposited in its general fund on specific expenditures. How to spend the SSUT proceeds was a case or matter left for another day — and the Legislature opted to answer that open-ended question in Morgan County with the Local Act,” according to the majority opinion.

The Association of County Commissions of Alabama wasn’t directly involved in the lawsuit, but filed an amicus brief last year on behalf of Morgan County. Executive director Sonny Brasfield said then that the issue wasn’t about SSUT, but counties being expected to deliver programs and services while general fund money is taken away.

Brasfield said the association was disappointed in the ruling, but doesn’t think it represents a sea change in the relationship between state statutes and local laws.

“But if this does represent a change by the courts, I do think there are going to be some impacts at the local government level,” Brasfield said Monday. “If the Legislature cannot protect the funding for counties by general law, if you can’t protect that revenue by general law, then that does create some very concerning issues for the long-term operations at the local level.”

Brasfield said local bills don’t get the same scrutiny in a legislative session that statewide bills do. Generally, if all lawmakers from a particular county agree to a bill for that specific county, the legislation passes easily.

Brasfield said he doesn’t think more local schools will try to get SSUT money the way Morgan County schools did.

“At the local level, county commissions and school boards must work together for either one of them to succeed,” he said. “I believe the leaders in education will tell you that without a good relationship with the county commission, their efforts are much more difficult. And part of the county’s function is to make the community better, and education is one of those things.”

Sally Smith, executive director of the Alabama Association of School Boards, agreed the ruling has an impact beyond the three school systems in Morgan County.

“The broader impact is the court upheld the Legislature’s authority to craft local laws based on local needs as it sees fit,” Smith said. “AASB was proud to file a friend of the court brief in support of the local school boards to protect the desperately needed funding set aside for those students.”