Alabama Online Sales Tax Fight Heats Up Before Session

Alabama’s battle over the Simplified Sellers Use Tax (SSUT) has grown louder this fall as Cities, Counties and school advocates line up on opposite sides of a lawsuit that could change how the State collects online sales taxes and how much money schools receive.

The SSUT is a flat 8% tax that out-of-state sellers and marketplace platforms may collect on purchases by Alabama residents. The law was created to simplify tax collection for sellers without a physical store in Alabama. Half the SSUT goes to the State and half is split among Counties and Cities. The Education Trust Fund gets a slice of the State share, but not the bulk of what a standard sales tax would send to education. The Alabama Department of Revenue’s 2024 report shows SSUT collections rose above $851 million in fiscal 2024.

The dispute began with a lawsuit filed in Montgomery Circuit Court by the City of Tuscaloosa, Tuscaloosa City Schools and the City of Mountain Brook. The plaintiffs argue the way the Alabama Department of Revenue runs the SSUT diverts money that should be going to Cities and school systems and that the Department’s approach conflicts with State law.

The Alabama Education Association (AEA) announced it has moved to join the case, saying the SSUT shortchanges local schools. “The current application of the SSUT shortchanges Alabama’s local schools,” said Theron Stokes, AEA Associate Executive Director. “Allowing remote sellers to remit the SSUT instead of remitting traditional State and local sales taxes diverts millions of dollars away from the Education Trust Fund and local school systems—money our schools desperately need.” The AEA filed a motion to intervene in the suit and argues that educators and school employees will be directly harmed if the system stays as is.

"When school funding is at risk, AEA will act," Stokes said in a statement. "We will always stand for a tax system that is fair, lawful, and ensures public education receives its rightful share."

On the other side, a broad coalition of Counties and many Cities have signaled strong opposition to changing or undoing the SSUT. The Association of County Commissions of Alabama (ACCA) says the lawsuit could threaten revenue that counties and cities rely on. “The attempt to dismantle the program does not help generate additional revenue,” ACCA Executive Director Sonny Brasfield told reporters, adding that all 67 counties and more than 150 municipalities have joined the association’s effort to defend the current structure. Brasfield also warned that if the SSUT goes away, Alabama would lose an enforceable means to collect tax from remote sellers.

What the change would mean is both simple and complex. If the Courts were to require out-of-State sellers to collect the same State and local sales taxes that brick-and-mortar stores collect, some Cities say they would receive more direct local sales tax revenue tied to their residents’ purchases. Plaintiffs contend that major online sellers with local operations—delivery drivers, warehouses or local staff—should not be treated the same as purely remote sellers. Opponents say altering the SSUT risks disrupting a system that now brings hundreds of millions into State and local coffers and could reduce the total collected or leave Alabama with no practical way to force out-of-State sellers to collect taxes.

Local leaders have split on the issue. Montgomery Mayor Steven Reed said the current formula does not fairly reflect where economic activity occurs and that larger cities need the resources to support services and infrastructure. “With more and more people making their purchases online, we want to make sure the formula between counties and cities is fair,” Reed said. By contrast, Montgomery County Commission Chairman Doug Singleton warned that changing the system could raise constitutional and practical problems. “From my understanding, they’re asking for the out of State companies to change it from a use tax to a sales tax… that opens it up for a lot of different problems to come, and constitutionally it’s not allowed anyway,” Singleton said.

Supporters of the lawsuit (favoring a change to how remote sales are taxed):

• Cities and local school systems that filed or joined the original complaint, including Tuscaloosa, Mountain Brook and Tuscaloosa City Schools.
• Additional Cities that have since joined or passed resolutions supporting the suit, including Mobile, Madison, Hoover and others.
• The Alabama Education Association, which filed a motion to intervene to protect school funding.

Opponents of the lawsuit (defending the SSUT as it stands):

• Association of County Commissions of Alabama (ACCA) and dozens of counties that say the program brings stable revenue to local governments.
• More than 150 municipalities that have joined ACCA’s position, citing risks to local budgets and services.

For Alabama schools, the stakes are clear. The SSUT now accounts for a rising revenue stream as more shoppers buy online. But the way the law routes money means the Education Trust Fund receives only a fraction of what standard sales taxes would send. AEA and its leaders say that diverts millions away from classrooms and teacher pay. If the court orders a return to standard sales tax remittance by out-of-State sellers—or if the State legislature changes the law—the Education Trust Fund and local schools could gain more direct dollars. But the shift could also lead to disputes over how to collect the tax from remote sellers, and critics warn it could reduce total collections or leave gaps in enforcement without a clear replacement.

As the lawsuit proceeds, expect more municipalities, county groups and interest groups to declare their positions. Lawmakers may also push bills next year to tweak or raise the SSUT or to change how remote sellers are taxed. For now, Alabama faces a choice: keep a simple, enforced system that brings in large, steady sums, or reshape the rules to try to put more direct dollars into schools and local budgets—with legal fights and uncertainty along the way.

The original lawsuit filed by Tuscaloosa, Tuscaloosa City Schools and Mountain Brook is available at THIS LINK, and the Alabama Education Association’s motion to intervene is HERE. Alabama Act 2018-539, which established the SSUT, is HERE.