A number of cities across Alabama have now signed onto a statewide lawsuit alleging the state’s formula for distributing online sales tax revenue is unfair.
At least seven cities and four entities, including Tuscaloosa City Schools, are now parties in the lawsuit, with more possibly joining ahead of Wednesday’s deadline. The City of Tuscaloosa, led by Walt Maddox, filed the lawsuit in August, along with Mountain Brook. Maddox has been an outspoken critic of the state’s Simplified Sellers Use Tax, which was implemented in 2015 and collects 8 percent in taxes for all online sales originating in Alabama.
“I have long said that the way this revenue is distributed is unfair to cities like ours,” Maddox said. “I vowed to do something about it. (SSUT) poses a significant financial threat to Alabama communities by diverting tens of millions of locally generated tax dollars away from essential public services each year.”
Every Alabama county, and dozens of smaller cities, have sided with the state in the lawsuit. Alabama Association of County Commissions Executive Director Sonny Brasfield said Tuesday that Tuscaloosa and the major cities who are plaintiffs in the lawsuit could expect stiff opposition from entities that represent every citizen in the state.
But the lawsuit has shaken lawmakers due to its targeted arguments attacking the manner in which the tax has been applied and the alleged unfairness of its distribution model. And the distribution of the funds is the primary motivation of the suit.
According to the plaintiffs, the model unfairly distributes the collected tax revenue—which has exploded over the past two years, up more than 30 percent in 2024 to just over $850 million—by failing to return the collected funds to the cities where the purchases originated and instead relying upon a blanketed split. Currently, the state takes half of the revenue and then divides the remaining portions among the cities (2.6 percent) and counties (1.4 percent).
If the lawsuit simply claimed that the split was unfair, the cities would likely have no legal ground to stand on. However, the lawsuit challenges the manner in which the tax is applied, arguing that it allows local stores to “opt in” on the SSUT tax and pay it instead of traditional sales tax collected.
For a municipality like Mobile, which has also joined the lawsuit, that means that a local store selling products online could opt into the SSUT and charge customers only an 8-percent tax instead of the 10 percent tax it would pay for in-person purchases. Of that SSUT revenue, the city would collect just 2.6 percent. It would get 5 percent of that tax revenue.
At a Decatur City Council meeting on Monday, where the council voted to support the lawsuit but not join as a plaintiff, Council president Kyle Pike said it was impossible to know how much revenue that the city is losing, but he said it was likely well into the millions of dollars annually.
“It’s around $7 million annually right now and I would expect it’ll be much more by the end of this,” Pike said. “I support what the lawsuit says. I think at the end of the day, what cities want is for the state to enforce the definitions of eligible seller and marketplace facilitator.”
It’s the opt-in portion of the SSUT law that is the focus of the legal challenge. By allowing sellers to decide how they’ll tax customers, the lawsuit argues, the state is abdicating its duties and allowing a private entity to levy taxes—a job that only the state legislature can legally do.
The fallout from the lawsuit has already started. State Senator Greg Albritton, chairman of the state’s general fund budget and chair of the Alabama Legislature’s Contract Review Committee, held up a number of proposed state contracts during last week’s meeting, arguing that they shouldn’t be approved while potential litigation is in the works. The contracts were mostly inconsequential, and they’ll all ultimately go through (because the committee lacks the power to stop any contract), but the purpose was to demonstrate that lawmakers were unhappy with the cities’ decision to move forward with the lawsuit.
Albritton, and others, believes that the lawsuit could significantly damaging effects on the state’s revenue collection in the coming years, potentially posing huge problems for state budgets that are already looking bleak thanks to big hits from the Trump administration’s cuts to various programs.
Albritton made no secret of those facts following the committee meeting, telling reporters that “politics has repercussions,” and hinting that he could also hold future contracts over the issue. “My perception is that this lawsuit is dangerous. It hurts the fiscal viability of the state.”
He also said that city officials should have come to the legislature and worked out their issues instead of filing the lawsuit.
That contention received pushback from Maddox, who said the mayors from Alabama’s largest cities have tried numerous times since SSUT was implemented in 2015 to demonstrate how unfair it is. Those efforts, he said, have failed and the lawsuit was the last option.
