The Public Affairs Research Council Alabama (PARCA) has released a report analyzing the impact of Alabama’s Simplified Sellers Use Tax (SSUT).

Since the law’s implementation in 2015, the SSUT has imposed an 8% tax – roughly equivalent to the state’s sales tax traditionally imposed on brick-and-mortar stores within the state – on online goods sold by out-of-state sellers.

However, there are discrepancies in the impact of the law between rural counties and more urban centers. As online sales boomed to become 15% of all commercial transactions in the United States last year, more rural areas have found SSUT disbursements to be a steady source of revenue, particularly in funding their local school systems.

For the more densely-populated urban counties, which tend to have higher local sales taxes, the SSUT undercuts brick-and-mortar stores by following the flat statewide rate. When local taxes are factored in, the average rate of sales tax for brick-and-mortar stores in Alabama is actually around 9.25%. In addition, online sales delivered to rural residents mean fewer sales – and fewer sales taxes collected – from the retail centers in cities.

The report makes specific mention that, for Fiscal Year 2021, Madison County received $7.2 million from SSUT, but if the tax revenue was distributed according to population and income, it would have received $10 million that year.

With that being said, it makes no sense to pretend that online retailing could, or would, simply cease. The trend towards online commerce has been steadily increasing since the year 2000. The Coronavirus Pandemic, and its accompanying lockdowns, merely accelerated that trend, with Alabama’s spending on SSUT-eligible goods quadrupling, from $2 billion in 2019 to $8 billion at the end of 2022.

By that same token, it also would not be reasonable to assume that this trend will continue indefinitely, wiping out traditional brick-and-mortar sales entirely. Online and in-person retail will reach an equilibrium at some point; the question is, at what percentage of sales will that equilibrium be found?

In addition, the traditional sales tax levied in stores benefit the cities and counties where those stores are located, not necessarily the counties from which many customers may have commuted, leading to a concentration of tax income – and subsequent budget for services – in those urban counties.

The report concludes that the SSUT is likely to remain, in some form or another, but it does provide suggestions for legislative tweaks that could be made to the tax.

The first option suggested by the report is simply hiking up the SSUT to match the average state tax rate of 9.25%. It has the advantage of being a minor tweak, easy to understand and implement.

It would also disincentivize businesses remaining out of state, or moving their products through an out-of-state online distributor.

However, the report also points out that simply hiking the rate does nothing to address criticisms on the distribution of revenue collected, and in addition, those counties and cities with tax rates lower than the state average would see a sharp hike in online transactions relative to brick-and-mortar.

A second option suggested by the report would be to require businesses to apply local taxes applicable to where the sale is made.

Notably, online small businesses that generate less than $250,000 per annum do not have to remit SSUT at all, allowing them to undercut in-person businesses of smaller size, who do not have a maximum threshold at all for local and state taxes, and other states that have online business thresholds usually have them at half the size of Alabama’s.

The third option suggested by the report would be to implement a streamlined sales tax to apply state and local taxes based on the jurisdiction in which the goods purchased will be delivered.

This is how 24 other states handle the issue, so there are plenty of existing templates to draw upon, but they can be more complicated for smaller businesses in terms of compliance.

In addition, the state would need to implement a larger administrative apparatus to catalogue, geocode, and communicate the applicable rates to online retailers.

This would almost certainly mean that local entities would have to cede the collection and distribution to Alabama’s State Department of Revenue, which has traditionally been a very unpopular notion in the state. Essentially, this option would enact the most equitable distribution of revenue collected, but at the cost of complexity and bureaucracy.

The PARCA Report certainly gives the citizens of Alabama a great deal to consider for the future. Between judicial decisions that can impact interstate or online commerce, new legislation that could be enacted to address issues before they become full-fledged problems, and the development of new technological and distribution customs, we must consider carefully how our state is to lay down the foundation for an equitable and prosperous future.