Senate Bill 221 Would Prohibit Credit Card Fees, Hurt Local Government

The City of Tuscaloosa, Tuscaloosa City Schools and dozens of other larger cities in the state recently dropped their lawsuit over online sales tax distribution against the state in favor of negotiations. Now comes Senate Bill 221 that would decrease revenue to the Education Trust Fund (ETF) and county and municipal funds by an undetermined amount of money.

The bill would prohibit state and local governments from taxing the convenience fees applied when people use credit or debit cards to make purchases. It sparked extensive debate in the Alabama Senate Thursday, leading to no vote being taken, for now.

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Decatur Sen. Arthur Orr (R-3) explained that there is nothing in current law prohibiting or addressing whether the state, counties and cities can apply sales and use tax to the fee charged by merchants when customers pay by card. His bill would specify that applying such a sales and use tax would be illegal.

Birmingham Senator Rodger Smitherman (D-18) was quick to tell the senate he had been receiving calls from cities telling him the legislation would, "put holes in our revenue."

The longtime Jefferson County Senator then offered to introduce an amendment to exempt Class 1 municipalities from the bill’s provisions. Before the amendment could be made, Sen. Orr carried the bill over to allow additional time for discussions.

With the 2026 legislative session at the halfway mark, it is unlikely that a negotiated solution over the state’s Simplified Sellers Use Tax (SSUT) before final adjournment.

Because the lawsuit was withdrawn without prejudice, the cities have retained the right to reinstitute it if a settlement cannot be reached.

The Alabama Retail Association is encouraging their members to contact their state senator to discuss SB221 and the importance of clear statutory guidance regarding the tax treatment of credit card transaction fees.

(Tuscaloosa Mayor Walt Maddox was contacted for reaction to the bill but had not responded as of publication time.)