Alabama’s tax for online sales, which took effect in 2016, is a fast-growing source of revenue for state and local governments, but lawmakers should consider changes to make it more equitable, the Public Affairs Research Council of Alabama said in a new report.

“E-Commerce and Taxation: Questions of Efficiency and Equal Treatment” was released today by PARCA, a nonpartisan research organization that provides information to help state and community leaders make policy decisions.

Read the report.

The Legislature created the Simplified Sellers Use Tax (SSUT) to capture tax dollars that were being lost as consumers increasingly made purchases online that they previously made in brick-and-mortar stores, avoiding the sales taxes that they paid in stores. Under the SSUT, online vendors collect an 8% tax on sales to Alabama customers, a uniform rate regardless of where the customer lives in the state. The 8% rate is meant to roughly approximate the combination of the 4% state sales tax plus the city and county rates, although it is slightly less, which is one of the problems PARCA cited.

Revenues from the SSUT have soared, to $634 million during fiscal year 2022, more than triple the $203 million collected in 2019.

The state distributes the SSUT revenue according to a formula. Half of the revenue goes to state government, equivalent to what the state receives from the traditional 4% sales tax. The other half goes to municipal and county governments and is allocated based on population.

The PARCA report says the SSUT, while an important boost overall, has created some “winners and losers.”

The simplified system, a single 8% rate paid to a single entity, the state of Alabama, is a benefit for retailers who do not have to account for the various city and county tax rates. Communities with less commercial activity benefit because they receive more under the SSUT formula than their proportion of traditional sales taxes.

On the other hand, large cities and counties with higher volumes of brick-and-mortar sales receive less under the SSUT formula than they would if the same purchases were made in stores. That’s partly because the weighted average sales tax, state and local rates combined, is 9.25%, more than the 8% SSUT rate.

Many traditional retailers are at a disadvantage because they must charge sales taxes higher than the 8% for online vendors. And while many school systems receive a portion of local sales taxes, only a limited number have worked out agreements with local governments to receive a share of the SSUT, the PARCA report said.

The report suggested three possible options to address the inequities:

• Raise the SSUT rate to match the prevailing local sales tax rate (9.25%).
• Join 24 other states that are participating in the Streamlined Sales Tax Organization, which aims to simplify and modernize sales taxes.
• Build a new system for online retailers to look up and submit sales taxes based on where the purchase is made.

The PARCA report says immediate action is not expected on proposed changes because the state has extraordinary surpluses in the Education Trust Fund and General Fund. But it will be increasingly important to make the SSUT as equitable as possible as online purchasing continues to grow, the report says.

Read more: Alabama cities, counties reignite high stakes battle over online sales taxes

“Alabama’s online sales tax program is still in its infancy, but it is one of the state’s emerging revenue sources with the most growth potential,” Ryan Hankins, executive director of PARCA, said in a press release. “In the six years since the SSUT program’s enactment, it has been a boon to state and local budgets — generating more than $1.8 billion over its lifetime that otherwise would have been lost. But is the SSUT collecting as much as other e-commerce tax programs could? Our analysis says not likely.”

The SSUT has provided an important boost for state budgets. The General Fund, which helps pay for non-education services like Medicaid, prisons, mental health, law enforcement, the court system and others, relied on mostly stagnant tax revenue sources before the SSUT and some other changes. The Legislature allocated 75% of the state’s share of the SSUT to the General Fund, with 25% going to the Education Trust Fund.

In fiscal year 2015, the year before the SSUT was created, the General Fund received $1.9 billion in tax revenues. In fiscal year 2022, the General Fund received $2.8 billion, including $238 million from the SSUT.

Related: