Economy

The Tyranny of Sales Tax: Alabama Cities Rely on It. Walmart is the Sought-After Retailer. But E-Commerce Threatens.

The Walmart in Gardendale brings in a significant portion of that city’s sales tax revenues. (Source: Robert Carter)

In Alabama, the big catch for the state’s economic development prospectors is a manufacturing plant and its hundreds, maybe thousands, of high-paying jobs. The recent announcement of a new auto manufacturing facility in north Alabama, a joint venture between Toyota and Mazda, is a perfect example.

But individual cities in Alabama go to great lengths to get big-box retailers to set up shop in their city limits, deploying consultants and dangling incentives. They’re following the money. Because of the state’s tax laws, the largest single source of municipal tax revenues is sales tax.

Big-box retailers come in several types and brand names. Target, Lowe’s, Home Depot, Publix, Kroger and Winn-Dixie are familiar names across the Southeast. Elsewhere, names such as Meijer, Giant Eagle, Menards and numerous other regional grocery, discount and home improvement brands are better known.

The biggest big-box of them all, though, is the largest private employer in the world. Walmart grew from its roots in Arkansas to be a major force in virtually every part of the United States, with more than 4,500 supercenters, smaller-format grocery stores and Sam’s Club warehouse clubs. More than 1.5 million people work for the company in the United States alone, with 38,000 in Alabama, according to the company website.

Tens of millions of customers across America walk through the doors of the company’s stores every day, buying all manner of merchandise. In Alabama, every city that has a Walmart within its limits gets taxes on sales to those customers, which helps pay for services such as police and fire protection. Walmart’s website states the company collected $684.6 million in sales taxes and fees in Alabama for the fiscal year ending in 2017 and paid another $92.1 million in its own additional taxes and fees.

Property vs. Sales Taxes

Dependence on sales taxes is unusual compared to most other states and harkens back to Alabama’s early days as a state that was almost entirely rural and dependent on the production of cotton and timber. Property taxes are lower than in other states, in some cases much lower, especially on agricultural and forest lands.

“Back then, because large landowners depended on agricultural success, they just didn’t have high property taxes,” said Greg Cochran, director of advocacy and public affairs for the Alabama League of Municipalities. “As our economies and cities’ demographics have changed, we’ve moved into more metropolitan-type areas, but our farming communities still have a large influence in our Legislature. They’ll argue that raising property taxes diminishes the ability of farmers to make a living.”

Today, many large rural tracts of land are owned by corporations, which lobby the Legislature to keep property taxes low. The property taxes cities are able to level almost always go toward education, Cochran said.

So, city and county governments seek revenue from the most readily available source allowed by Alabama’s constitution. For the most part, that’s sales tax.

The state’s cut of sales tax is 4 percent. Cities and counties are allowed to add taxes over and above that for their purposes. Jefferson County adds a 2 percent sales tax, while Shelby County adds 1 percent. City tax rates are mostly an additional 4 percent, though Hoover and Mountain Brook charge just 3 percent. Birmingham’s rate is 4 percent.

A Tour: Alabama’s Crazy Quilt of Taxes

The patchwork of tax rates for different cities, and unincorporated areas where no city taxes are collected, means that businesses near each other may have significantly different totals on a purchase. For instance, the city of Pinson in northeast Jefferson County has a 4 percent city rate, which means that businesses inside the city limits collect a total of 10 percent. But because a land parcel just 200 yards from City Hall is not annexed and lies in unincorporated Jefferson County, the McDonald’s restaurant located there adds just 6 percent to a Big Mac and fries, while restaurants next door and across the street tack on the full 10 percent.

A shopping trip along U.S. 280 can be even more confusing when it comes to sales taxes.

If you go on a spree at The Summit, located in Birmingham’s limits and in Jefferson County, you’ll pay a full 10 percent. But go a couple of miles south across the Cahaba River and stop by the McDonald’s not far past the bridge, and you’ll be in a small part of unincorporated Shelby County. There the sales tax is just 5 percent — the lowest in the state.

Go a few yards farther south on 280 and you’ll be in part of Birmingham that lies in Shelby County with a total rate of 9 percent; elsewhere along the same road are businesses in Hoover’s limits, with a total sales tax of 8 percent.

The Walmart Effect  

For an Alabama city dependent on sales tax, the opening or closing of a Walmart can go a long way in setting its fiscal fate. As examples: Walmart is the biggest tax producer in Gardendale by a wide margin. In Fairfield, a steady stream of sales tax revenues dried up when Walmart closed its store there.

The old Walmart building in Fairfield sits vacant. (Source: Robert Carter)

Beyond the money, the effect of a Walmart is widely debated.

Multiple books have been written on what happens to a city when Walmart sets up shop. The best known of them is probably “The Wal-Mart Effect,” by Charles Fishman. The 2006 book says that having Walmart lowers prices and brings better merchandise selection, but it also lowers prevailing local wages and causes loss of business for traditional small businesses.

Another book by Ball State University professor Michael Hicks disputes the negative effect on other stores. In a story in The New Yorker magazine about the closure of a Walmart Supercenter in Fairfield — which resulted in a loss of at least a third of the city’s total tax revenues — Hicks said, “There is very little compelling evidence that Walmart crushed small businesses. On the contrary, Walmart killed Sears and Kmart.”

Research by Hicks and two Ball State colleagues found Walmart helps lower unemployment rates among African-Americans and lowers prices “probably the equivalent of a month of grocery bills for a low-income family.”

Also, Walmart stores may put a burden on a city’s police force. Major crimes tied to the chain are rare, but incidents of shoplifting and other minor crimes are numerous. Gardendale Police Department’s weekly incident report made available to news media rarely mentions Walmart by name, but multiple entries list an address of 890 Odum Road — the store’s street address.

Local police in Alabama are often reluctant to complain about the added workload, given the chain’s contributions to their own budgets. But in recent years, more police chiefs and mayors elsewhere in the country have gone public about how the giant retailer has become a drain on resources.

Two August 2016 stories in national news magazines — one in Time magazine and another appearing two days later in Bloomberg Businessweek — detailed the problems faced by law enforcement at Walmart stores. The departments were forced to assign officers on a regular basis to handle the large number of cases, most for shoplifting or theft, according to the reports. One officer in the Tulsa, Oklahoma, police department spent 10 hours a day in a security office at a store, prompting his colleagues to call him “Officer Walmart.”

Still, cities continue to try to lure the biggest of the big-box retailers — even as Walmart, and the cities financially dependent on it, face unprecedented challenges from the rapid rise of e-commerce.

Sales Tax in the Amazon Age

Online retailers such as Amazon have taken large chunks of business away from brick-and-mortar retailers in general and Walmart in particular. The company has moved quickly to advance its own e-commerce efforts and has made considerable progress, but so far not enough to satisfy its stockholders. Share prices of Walmart took a dive after the company’s most recent quarterly earnings report showed that their online sales had not met expectations during the peak holiday sales period.

“There’s just not as many big-box stores that are expanding because of e-commerce,” Gardendale Mayor Stan Hogeland.

It’s a problem that all brick-and-mortar stores are feeling, but Walmart is one of the few companies with deep enough pockets to weather the storm and offer its own online service. When customers place an order through Walmart’s website or app and have it sent to the nearest store for pickup, which the retail giant encourages by offering free shipping to stores with no membership fees, then cities get their normal sales tax revenue on the sale.

(Source: Pixabay)

That’s not the case with online retailers without a physical presence in a city. Early on, one of Amazon’s chief selling points was the lack of sales taxes charged, which meant a 10 percent discount right off the top for many Alabama shoppers. That has since changed. Amazon now collects sales taxes on items it sells directly, though it does not do so for third-party sellers who use Amazon for order fulfillment. Walmart.com has the same policy for third-party sellers.

Even when sales taxes are collected, Amazon and other larger e-commerce firms face the tricky issue of figuring out exactly where a customer lives, and therefore which cities and counties get their cut of the tax. With Alabama’s crazy-quilt system of hundreds of tax jurisdictions, that’s a huge challenge.

The Alabama League of Municipalities is trying to make things easier, if for no other reason than to ensure that its member cities get their share. Cochran said the league has set up a task force specifically focusing on the digital economy and is proposing a voluntary program called Simplified Sellers Use Tax and Remittance program, which offers online sellers a flat, reduced tax rate. But there have been few takers so far.

The task force is chaired by Tuscaloosa Mayor Walt Maddox, who is also seeking the Democratic nomination for governor in this year’s election. Hoover Mayor Frank Brocato and Center Point Mayor Tom Henderson are also on the task force.

The issue — which threatens the financial lifeblood and services of Alabama cities — is front and center for local officials. Maddox told the task force that his city had lost an estimated $5 million last year due to online sales, which forced a 5 percent cutback in departmental budgets for this fiscal year.

It’s also affected Hoover, home of one of the state’s largest retail centers. Brocato announced on March 15 that the city would cancel its annual Freedom Fest because of what he called “cash flow problems,” mostly from lower sales tax collections. In several media reports, Brocato referred to the problem as “the Amazon effect.” Online sales also have been reported as a cause of the bankruptcy and coming closure of the entire Toys ‘R’ Us chain; Hoover was home to the last of the chain’s locations in metro Birmingham.

 

Robert Carter covers economic development in Birmingham and Alabama, a new assignment in 2018.  He is a veteran journalist, both with newspapers and in radio. A Kentucky native, Carter began working at his hometown Glasgow Daily Times straight out of high school. He also worked with Christian Family Radio in Bowling Green and with Western Kentucky University’s public radio service.  In Alabama, Carter has worked at The Birmingham News and The North Jefferson News in Gardendale.