The City of Tuscaloosa plans to sue the state over the way it collects taxes from Internet sales.

It’s the latest salvo in an ongoing dispute involving Mayor Walt Maddox, as well as other mayors in Alabama, who say that the state’s formula is taking potential revenue from cities and unfairly distributing it to municipalities around the state.

On Tuesday, the City Council voted to authorize filing legal action against the Alabama Department of Revenue, Revenue Commissioner, and any other state party over the issue.

Maddox says the formula is costing Tuscaloosa as much as $12 million a year, and threatens to take more as online sales grow in popularity, especially among Tuscaloosa’s student population.

The suit is prompted by what officials say is a “loophole” in the state’s current online sales tax structure, known as the Simplified Sellers Use Tax (SSUT).

The SSUT was hailed upon adoption as a way to glean tax revenue from the growing e-commerce sector. In Alabama, online sales accounted for 16% of all retail sales last year, up from 8% in 2016.

According to the Alabama Department of Revenue in 2024, the SSUT generated $851.2 million, up 34% in two years and more than 1,500% since the first year.

Under the 9-year-old SSUT, half of the revenue from the 8% goes to the state and the other half to cities and counties.

Under the tax, the state share is split with 75% to the General Fund and 25% to the Educational Trust Fund (ETF). The half that goes to the cities and counties – a focus of disputes over the years – is doled out based on population with 40% to counties and 60% to cities.

But Tuscaloosa is arguing that more tax money should be flowing locally.

For example, delivery services, like Doordash, are subject to the SSUT’s lower 8% sales tax rate. Yet they have a physical presence in cities, critics argue, that should require them to pay the same sales taxes as brick-and-mortar businesses.

According to The Tuscaloosa Thread, city officials estimate they will lose $14.6 million in sales tax revenue this fiscal year because of the SSUT structure.