Online Shopping vs. Brick-and-Mortar: Which is Better for Local Revenue?

As ecommerce continues to reshape how consumers shop, a critical question has emerged for cities, counties, and states alike: does more online shopping reduce local sales tax revenue, or does it increase it?

The answer depends less on consumer behavior and more on how online sales tax is structured, collected, and distributed. While ecommerce sales tax collections have grown nationwide since the Supreme Court’s South Dakota v. Wayfair decision, many local governments argue they are not receiving their fair share—especially when compared to revenue generated by a traditional brick and mortar shop.

A growing legal dispute in Alabama over online sales tax distribution has brought this issue into sharp focus, highlighting the tension between simplified ecommerce tax systems and the realities of local government funding.

Online Sales Tax vs. Local Sales Tax: Why It Matters

At the heart of the debate is the difference between online sales tax systems and traditional local sales tax structures.

For in-person purchases at a brick and mortar shop, sales tax is typically collected at the combined state, county, city, and special district rate. That revenue is then distributed directly to the jurisdiction where the sale occurs. Local governments rely on this funding to support police, fire protection, infrastructure, and schools.

With ecommerce, sales tax is often intended to be collected and distributed in the same way. However, certain state programs and tax collection frameworks place online sales tax on a different path, which can significantly impact how much revenue local governments ultimately receive.

To encourage compliance and reduce administrative burdens for remote sellers, some states have adopted simplified ecommerce sales tax programs. While these programs often succeed in increasing total tax collections, they can unintentionally distribute revenue in ways that disadvantage certain localities.

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The Alabama SSUT Case

Alabama’s Simplified Sellers Use Tax (SSUT) program was designed to streamline collecting local sales and use tax on remote and online sales. Under SSUT:

• Eligible online sellers collect a flat 8% tax rate
• Revenue is pooled at the state level
• Funds are distributed to counties and municipalities based on population, not point of delivery
• The remaining portion supports statewide education and general funds

While SSUT dramatically improved ecommerce sales tax compliance, many cities now argue that it hurts local sales tax revenue, particularly for fast-growing communities with high online purchasing activity.

Several Alabama municipalities—including Tuscaloosa, Mobile, Montgomery, and Madison—have challenged the SSUT framework, claiming it violates constitutional principles by diverting revenue away from jurisdictions where purchases actually occur.

The simplified argument is this: if the same purchase were made at a local brick and mortar shop, the city would collect significantly more local sales tax than it receives under SSUT.

Why Cities Say Ecommerce Sales Tax is Undermining Local Budgets

Flat Online Rates vs. Higher Local Rates

Many Alabama cities have combined sales tax rates that exceed 8%. When online purchases are taxed at a flat rate, the difference represents lost local sales tax revenue, even though the consumer lives in—and benefits—from that city’s public services.

Population-Based Distribution Doesn’t Match Spending

SSUT revenue is shared based on population rather than where the buyer lives or where the product is delivered. Cities with strong ecommerce activity argue that their residents generate more online sales tax than the city receives back.

Unequal Treatment of Brick and Mortar Shops

Local retailers must collect and remit every layer of local sales tax, while online sellers participating in simplified programs may collect less. Protestors against SSUT argue that this disparity:

• Creates a pricing disadvantage for brick and mortar shops
• Encourages consumers to shop online rather than locally
• Further erodes traditional local tax bases

Do Communities Benefit From Online Sales Tax Systems?

Yes, which is why the issue is so complex.

Some studies have shown that many rural counties and smaller municipalities benefit from systems like SSUT for several reasons:

• They receive revenue despite having little retail infrastructure
• Online sales generate funding that brick and mortar stores never could
• Distribution formulas help stabilize budgets in low-commerce areas

For this reason, some counties and cities in Alabama with limited retail development continue to support SSUT, arguing that without pooled ecommerce sales tax revenue, they would struggle to fund essential services.

Sales Tax Allocation Problems Nationwide

Olmos Park, Texas: Misallocated Local Tax

In parts of Texas, cities like Olmos Park have encouraged residents to verify that their online shipping address lists Olmos Park, and not a neighboring city such as San Antonio. This is to ensure that local sales and use tax is properly assigned. Misattribution can and has caused tax revenue to flow to the wrong jurisdiction.

California’s Attempt to Reform Local Sales Tax Incentives

In California, the issue arose not from pooling ecommerce tax revenue like Alabama’s SSUT, but from local governments competing to capture online sales tax revenue.

Historically, California sourced certain online sales based on the seller’s location, not the buyer’s. As a result, some cities offered rebates and incentives to large ecommerce retailers to list their headquarters or principal sales offices within city limits—allowing those jurisdictions to claim local sales tax revenue from online transactions occurring statewide.

In response, California Senate Bill 531 (2019) was introduced and passed the legislature (though later vetoed) to prohibit local jurisdictions from offering these “kickbacks” in exchange for becoming the point of sale for ecommerce retailers.

States With No (or Limited) Local Sales Tax

Some states limit or prohibit local governments from imposing additional local sales taxes, which can affect how online sales tax revenue supports local services.

Mississippi, for example, imposes a 7% statewide sales tax, but only two cities—Jackson and Tupelo—are permitted to levy local sales taxes. In most cases, Mississippi prevents local governments from imposing additional sales tax.

Other states that do not allow local governments to add additional sales tax rates include:

• Connecticut
• Indiana
• Kentucky
• Maine
• New Jersey

While the absence of local sales tax can simplify compliance for businesses, it may also limit funding options for local services and reduce parity between ecommerce transactions and purchases made at a brick and mortar shop.

Why Collecting Local Sales and Use Tax Correctly Is Critical

From a policy and compliance perspective, the challenge isn’t whether to tax online sales: it’s how to collect and distribute ecommerce sales tax fairly.

Key questions states continue to grapple with include:

• Should online sales tax be destination-based or pooled?
• How can simplified systems still reflect local tax rates?
• How do states maintain parity between ecommerce and brick and mortar shops?
• What role should states play in redistributing local revenue?

As ecommerce grows, pressure will increase on legislatures and courts to modernize local sales tax collection frameworks in ways that balance simplicity, fairness, and sustainable local funding.

Sales tax rules are changing—your compliance strategy should too.
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