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Morgan schools win court battle on online sales tax

By Eric Fleischauer  

For the Enquirer 

A judge upheld the constitutionality of a local law March 3 and ruled that the bulk of online sales taxes received by the Morgan County Commission must be disbursed to the three school districts in the county. 

The money involved is substantial. Since Oct. 1, the Alabama Department of Revenue has distributed five monthly payments to the county commission totaling $722,053, which have been held in an escrow account managed by the Montgomery County Circuit Court. Absent the local law, the commission could have kept all of it. 

The court ruled the commission is entitled to keep the 5 percent allowed under the local law, or $36,103, with $675,661 to be divided among the school districts and $10,289 to be shared by volunteer fire departments in the county.  

The judge’s ruling said the commission must distribute future online sales taxes in the same proportions, which are established by the local law. 

The commission had refused to comply with the Morgan County-specific law, sponsored by Sen. Arthur Orr, R-Decatur, that required it to treat online sales tax revenue in the same way it treats brick-and-mortar sales taxes, arguing the local law was unconstitutional.  

Hartselle City Schools filed suit Oct. 1, the effective date of the local law, and Decatur City and Morgan County schools soon joined the lawsuit. In a Feb. 18 hearing before Montgomery County Circuit Judge James Anderson, the Morgan County Commission argued the local law was unconstitutional because it was inconsistent with the statewide Simplified Sellers Use Tax law that controls online sales tax collections. 

Tuesday, the judge rejected that argument. 

Orr said the ruling was critical to the future of the county. 

“If Morgan County is going to progress and grow, it’s got to have the strongest public education system that it can have,” Orr said. “Traditionally, sales taxes have always gone to schools, and this money is important to our local schools. 

“I would hope the commission would not appeal this case but accept the judge’s ruling, give the fire departments and schools the sales tax money and move on. Otherwise both entities, the commission and the schools, will continue to pay the lawyers, and that doesn’t benefit anyone.” 

Legal argument 

The County Commission’s legal position focused on Section 105 of the Alabama Constitution, which generally prohibits a local law from contradicting a statewide law. The statewide SSUT law, which became mandatory for most online retailers Jan. 1, 2019, provides for an 8 percent online sales tax to be collected by the state, with a portion to be allocated “to each county in the state, (to be) deposited into the general fund of the respective county commission.” 

The local law, however, requires the commission to redirect all but 5 percent of the online sales taxes it receives. It requires the commission to send 85 percent of the remaining funds to the three public school systems in the county, to be distributed proportionally based on enrollment. Another 1.5 percent of the funds are required under the local law to go to volunteer fire departments and 13.5 percent to Morgan County Schools. The bill’s formula divides the online sales taxes in roughly the same way brick-and-mortar sales taxes are divided. 

In its March 3 ruling, the court relied on case law setting forth “the general rule that county funds belong to the state, such that the state — including the Legislature — can direct how they are allocated, distributed, spent, or otherwise used.” 

The statewide SSUT law is not an exception to this general rule, the court decided, and the local law does not contradict the statewide law. 

“The court concludes that the local act is fully within the Legislature’s authority and does not violate Section 105,” the judge wrote. “Therefore, the county commissioners must do as the local act requires.” 

The court ruled that the Montgomery County circuit clerk immediately disburse to the commission $46,392 of the amount in escrow, $10,289 of which the commission must forward to volunteer fire departments. He ordered the school districts, within three days, to instruct the clerk on how to divide the remaining $675,661 among the three districts. 

In the future, according to the order, the County Commission must distribute SSUT revenue it receives from the state in accordance with the local law. 

“This is great for all the students in Morgan County,” said Hartselle City Superintendent Dee Dee Jones, the lead plaintiff in the lawsuit that was coordinated by the Alabama Education Association. “We’ll be able to offer additional instructional opportunities. We’ll be able to plan and provide for the future of our students in Morgan County.” 

New school possible 

Jones said the local law and the lawsuit enforcing it were necessary because online sales continue to increase relative to brick-and-mortar sales. 

“We needed those funds for our students. It’s going to help continue programs and possibly help us to build a new elementary school in Hartselle,” Jones said. 

Morgan County Commission Chairman Ray Long did not return a call Tuesday evening. 

Morgan County Commissioner Jeff Clark said he did not know whether the commission will appeal the ruling. If the ruling stands, he said it will complicate the county’s ability to provide services beyond those mandated by state law. 

“We’re going to do the best we can with what we have. We’re going to still try to do the things we’re required to do, as far as keeping roads and rights of way safe, but we might have to do it with less people,” Clark said. “We’ll just have to task people to do more with less. Some of the things we wanted to do, we might have to scale back.” 

He said the county will likely have to limit major in-kind projects for schools. 

“We’re going to have to pick and choose what we can do,” Clark said. “We did the site prep for Priceville Elementary School, and in-kind service on that job was about $600,000. Now I’m not sure we would be able to do jobs of that scope. As far as stepping out and doing big projects, I don’t know that we’ll be able to.” 

Morgan County Schools Superintendent Bill Hopkins Jr. said his hope and expectation is that the County Commission will continue to assist the schools. He said the gradual replacement of brick-and-mortar sales by online sales has hurt the schools. He said the County Commission, which before the SSUT law had not benefited from sales taxes, received a windfall when it began receiving online sales tax revenue. 

“I don’t see where any in-kind services should change because the fact is it was a new source of funding to them; it’s not a new source to us. But, if that is the way they wish to do things, I will respect that and I will leave that up to the voters of Morgan County,” Hopkins said. 

Before the local law took effect Oct. 1, the County Commission received and kept $852,083 in SSUT funds in 2019, according to Department of Revenue records. 

Decatur City Schools Superintendent Michael Douglas said DCS had already budgeted the online sales tax money when the County Commission declined to obey the local law, in what he described as “a money grab.” 

“Sales tax has always gone to the schools, always gone to kids,” Douglas said. “My hope is the County Commission will quit wasting people’s time. Let’s get this money into the hands of these three school systems so we can spend it on our children.” 

 

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