City of Tuscaloosa Gears Up to Sue Alabama Over Internet Sales Tax

Tuscaloosa is gearing up to sue the State of Alabama over how internet sales tax revenue is distributed, as Mayor Walt Maddox wages war on a system he says is depriving the city of more than $10 million each year.

At issue is the complicated Simplified Sellers' Use Tax, a decade-old state law that took effect in 2016 and charges 8 cents on the dollar for purchases made online.

To oversimplify the matter, that revenue is then divided in half. Four cents go to the state, where a penny is allocated to the education trust fund, and 3 cents are added to the general fund.

The other 4 cents are added to a pool and split between local governments, but with no consideration for destination sourcing - where the online purchase was made. All 67 counties and 463 different municipalities receive a fraction of that money proportional to their populations.

That means tax revenue from an online order made from a phone in Tuscaloosa, buying goods from a Tuscaloosa business, and getting delivered to a Tuscaloosa address then goes on to benefit Tuscumbia, Talladega and more than 500 small governments across the state who didn't have anything to do with the sale.

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If you're lost, a real-world example provided by Maddox is a $300 grocery purchase. Buying that much merchandise in person at the Walmart Supercenter on Skyland Boulevard would generate close to $11 in tax revenue for the city of Tuscaloosa.

Placing the same order online for delivery would subject you to the less-expensive 8-cent SSUT, but the city of Tuscaloosa would only collect $0.24 in tax revenue.

Data provided by the mayor shows 29 percent of the city's population has purchased online from Walmart in the last six months, and almost 75 percent have bought something from Amazon.

The growing popularity of online shopping means that more and more tax is being collected through SSUT and then distributed among 500 governments, rather than supporting the city where the order was placed or delivered.

Maddox and city staff estimate Tuscaloosa will "lose" $14.6 million in sales tax revenue because of the SSUT structure in Fiscal Year 2025 alone. That creates a staggering impact on the city's roughly $200 million General Fund Budget.

The tax structure also hurts small businesses in cities like Tuscaloosa, where the online sales tax rate is lower than the city's 10-cent sales tax. Customers can save money buying a bicycle or a diamond ring online instead of in-person from a Tuscaloosa store, but where does that leave VeloCity Cycles or Hudson-Poole Fine Jewelers?

The mayor has been a vocal advocate for SSUT reform, launching an extensive and informative website to illustrate its impact on cities across the state. Earlier this year, he hosted 50 mayors to explain the problem in detail.

On Tuesday, the City Council voted to authorize City Attorney Scott Holmes to file a legal action against "the Alabama Department of Revenue, the Commissioner of the Alabama Department of Revenue, the State of Alabama, and any other necessary parties," over how they distribute online sales tax.

The permission for the lawsuit comes at Maddox's request, and he explained his reasoning in a statement released to the Thread on Tuesday.

“It is common sense - Tuscaloosa should keep what it earns, and our small businesses should have the same advantages as out-of-state corporations. This is why we intend to file a lawsuit to address the long-standing concerns of Alabama’s Simplified Sellers Use Tax," Maddox said. "If common sense prevails, our small businesses win, which will only strengthen our schools, public safety and infrastructure. This is not a step we take lightly, but feel is necessary to ensure that Tuscaloosa’s schools, community and small businesses are treated the same as corporations in California, New York and other states.”

For more coverage of this legal battle and what it will mean for the financial future of the Druid City, stay connected to the Tuscaloosa Thread.