Schools see little of internet sales tax

Published 3:00 am Saturday, September 22, 2018

Dr. Lee Hicks, superintendent of Troy City Schools, stood before his board at a meeting earlier this month and admitted he made an online purchase that ended up costing the school board sales tax revenue.

“I was buying a scientific calculator and looked on to see if it was at the local store,” Hicks told the board. “I saw that it was and I thought ‘I’ll just go ahead and buy it now.’ It wasn’t until the next day I was talking to (Chief Financial Officer) Mickey (Daughtry) that because I bought it online, none of that money went to the local schools.”

Hicks was using the purchase as an example of how the school system could be losing out on internet sales tax revenue that has been steadily growing in Alabama over the past two years.

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Fortunately for the school system, Hicks’ purchase did go toward the system’s local funding – Walmart has been collecting and remitting local sales tax for years because they have a physical presence in the state, which had been the national standard for whether a state could require a company to do so.

While Hicks misspoke about the anecdotal case of losing sales tax revenue, the current system for collecting sales tax from out-of-state sellers does cut out the local sales tax funding for schools and contributes less to the state’s Education Trust Fund than state sales taxes.

Until January 2016, Alabama did not see any revenue from internet sales at all. Alabama citizens could go on the Amazon website and purchase any item without paying a cent in sales tax. So the legislature introduced the Simplified Sellers Use Tax (SSUT) to begin bringing in those funds the state was losing each year.

At that time, there was no requirement for any company with no physical presence in the state to collect and remit sales tax. Alabama residents were instead obligated to file the sales taxes to the state themselves, but few residents did so and the Department of Revenue could not track and collect the money.

The SSUT was offered to companies as a voluntary endeavor that would allow them to “lock in” a flat rate of 8 percent on all purchases instead of having to remit taxes based on the various different rates around the state.

The state collects 4 percent of that, of which 75 percent goes to the general fund and 25 percent to the Education Trust Fund. The remaining 4 percent is split down the middle between counties and municipalities and then distributed based on population.

Although the county receives an approximate equivalent of the 2-cent sales tax that is levied countywide, none of that currently goes to the school systems.

The 2-cent sales tax charged on local purchases, in comparison, is almost entirely earmarked for the local school systems. Pike County School and Troy City Schools split the first cent based on Average Daily Membership (ADM). The county gets 25 percent of the other cent plus $150,000 off the top before the two school systems again split the remainder based on enrollment figures.

County Administrator McKenzie Wilson said local sales tax revenue is up for the county, although it is not what was projected in the budget.

“But with the internet sales tax, we’re ahead of what we projected,” Wilson said.

But while the online tax revenue is boosting the county’s general fund revenue by about $130,000 this year, Daughtry said that isn’t helping the school system out at all.

“Costs are rising,” Daughtry said. “Operating costs for paper, pens, supplies for maintenance, supplies like light bulbs, paint, things of that nature. We have aging facilities, which means more maintenance. This year it just seems like we’ve had a sluggish growth in sales tax revenue. This could be just part of it, but it has not grown as much as we had hoped.”

Although the school systems have never had any income from the collection of sales tax on online purchases, Daughtry said that revenue is likely cutting into the amount that would otherwise be spent locally and generating sales tax revenue for the schools.

“It’s just re-slicing the same pie,” Daughtry said. “You’ve got people that instead of buying something, instead of going to Walmart and buying it and standing in front of a counter, they’re buying it online. And we understand technology and how it grows, simply a matter of convenience – I do the same thing. But we’ve also got to encourage, if you shop locally you’re supporting your local institutions.”

Dr. Mark Bazzell, superintendent of Pike County Schools, said it is impossible to measure just what kind of impact the growth of online shopping has had on potential revenue.

“I’m not sure if there’s any way of gauging the effects,” Bazzell said. “Any time folks make an online purchase, whether there’s a tax associated with it or not, local schools do not receive any portion of that money. It would be our wish for people to buy locally; it’s good for local business and those entities that receive tax dollars through local purchases.”

And if people in Pike County are making purchases online and paying taxes on those sales, Bazzell said the school system could put that money to good use.

“If purchases are made by people in Pike County and those purchases are online, ultimately we’d like to see a portion of those proceeds come back to us,” Bazzell said. “It’s a complicated process, so I’m not sure how that would work or if the state would need to be involved in that for some of that to occur.”

Based on the internet sales tax collected by the Pike County Commission in the fiscal year that ends September 30, Daugthry said dividing the revenue to the two school systems based on the ADM formula used to distribute local sales tax funds would have brought about $65,000 in extra revenue. Pike County Schools would have received an additional $72,000.

Rep. Alan Boothe, R-Pike, said nobody has brought this information to his attention before.

“That’s not been brought up to me before,” Boothe said. “I think the interpretation of that would have to be done by the Department of Revenue. They’ve got to interpret the Supreme Court ruling (in June 2018 that affirmed that states can require companies to collect and remit sales tax) as it applies to the state. The Department of Revenue has got to make the initial call. We wouldn’t want (online sales) to grow at the expense of local education. There may be some bumps in the road, but we can work through it.”

Internet sales are expected to continue to grow as more and more people shop online.

“Right now just 9 percent of all Alabama retail sales are online and mobile sales,” said Nancy Dennis, director of public relations for the Alabama Retail Association. “We’re talking about less than 10 percent, but it is also growing. Retail sales overall are growing about 3.4 percent. Online sales are growing by over 16 percent, so they’re growing four times faster than brick and mortar sales.”

After the Supreme Court’s June decision that reversed precedent and affirmed that states can require outside retailers to collect sales tax, Alabama will begin holding them accountable for collecting taxes beginning on October 1, which means even more internet sales tax revenue can be expected to come in in the upcoming year. And in January 2019, third party sellers with over $250,000 in Alabama sales will also be obligated to contribute sales taxes.

Daughtry said school officials aren’t complaining about the system, they’re just asking for a second look to ensure Alabama schools continue getting the funding they need to properly educate students.

“Would hope the legislation would be revisited so local education systems would get some portion of it,” Daughtry said.