Alabama Sales and Use Tax Guide: Rates, Nexus & Exemptions

Sales and Use Tax Basics in Alabama

Sales Tax

In Alabama, sales tax is considered a privilege tax on the retail sale of tangible personal property, or tangible goods, within the state. The sales tax applies to the gross value of taxable goods sold for consumers’ use or consumption within the state, unless a specific legal exemption applies. 

Taxable persons collect this tax from final consumers at the point of sale and then remit it to the Alabama Department of Revenue. Generally, any sale of tangible goods is considered a retail sale subject to sales tax, unless it meets the legal definition of a wholesale sale.

Use Tax

When the sales tax has not been collected and remitted to the Alabama Department of Revenue, consumers must pay the use tax. Typically, this occurs when consumers purchase goods from out-of-state or remote sellers and have them delivered to their Alabama addresses. However, if consumers paid sales tax in another US state, they can document this and request that the use tax be treated as a tax credit.

In addition to this, the seller’s use tax applies to retail sales of tangible goods made by businesses located in Alabama that do not keep inventory there but still conduct sales in the state through sales offices, agents, or other significant ongoing connections, known as nexus, with the state.

Alabama Sales and Use Tax Rates

The general state sales and use tax rates in Alabama are set at 4%. However, for some sectors, this rate is set differently. For example, food, groceries, and sales through vending machines are subject to a 3% sales tax, and the automotive industry is subject to a 2% tax. Additionally, manufacturing and farm machinery are taxed at a  1.5% rate. In addition to these, other sectors, such as healthcare, telecommunications, and utilities, are subject to different rates, which can be either percentage-based or amount-based. 

Besides statewide sales and use tax, counties and municipalities also impose local taxes, including sales, use, lodging, and rental taxes. There are over 200 different county and municipality sales taxes, which add to the complexity of Alabama sales and use tax compliance.

Tax-Exempt Transactions

Unlike in many other US states, in Alabama, churches and non-profit organizations generally do not qualify for sales or use tax exemption. Consequently, these organizations must pay sales or use tax on all purchases of tangible goods and, when selling such property at retail, are required to collect and remit the sales tax unless a specific law provides an exemption.

On the other hand, specific organizations are exempt from sales and use tax if recognized explicitly by the state, such as public and private schools, hospitals, mental health and rescue services, certified blind vendors, scouting organizations, credit unions, and fire and water authorities.

Additionally, common sales tax exemptions include prescription drugs, gasoline and motor oil, agricultural products such as fertilizer, seeds, and livestock feed, as well as baby chicks and livestock. Exemptions also apply to sales to government entities and separately billed labor for the repair or installation of property.

Notably, any sales and use tax exemption defined applies only to the state level. Local county and municipal taxes are not affected unless the local government adopts the same exemption through its ordinance or resolution. Therefore, even if some transactions are tax-exempt at the state level, local taxes may still be applicable.

Nexus Rules in Alabama

For a taxable person to become liable for sales and use tax in Alabama, they must establish a nexus in the state. There are three types of nexus that a taxable person may establish: physical, economic, and marketplaces nexus.

Physical Nexus

To establish a physical nexus, taxable persons must have a place of business in the state, such as owning or leasing property. Additionally, having inventory, employees, affiliates, or independent contractors in the state is sufficient to establish physical nexus. Also, delivery in the seller’s vehicle or equipment leased by the seller establishes a physical presence.

Economic Nexus

Remote or out-of-state sellers without physical presence in Alabama are still required to comply with sales and use tax rules and regulations if they exceed the USD 250,000 threshold in total retail sales delivered to Alabama in the previous year.

Marketplace Nexus

Similar to remote or out-of-state sellers, if marketplace facilitators exceed the USD 250,000 threshold in total sales, including their direct sales, sales by related parties, and the combined transactions made by all marketplace sellers through the marketplace facilitator’s marketplace, they are required to collect and remit sales tax.

Taxable Goods and Services in Alabama

Sales and use tax applies to the sale of tangible goods, unless they are specifically exempt. Examples of taxable goods include prepared and restaurant food, clothing, and automobiles. Contrary to this, services are generally not subject to sales and use tax, even if sold together with tangible goods, as long as they are stated separately on the invoice. Only services that are strictly defined as taxable, such as admissions to entertainment or amusement events, are subject to sales and use tax.

Bundled Transactions and the True Object Test

The retail sale of two or more distinct products sold together for a single non-itemized price is considered a bundled transaction. However, a bundled transaction does not include sales where the price changes based on the buyer’s selection of products. 

Certain sales are excluded from being considered bundled, such as when one product is essential to the use of another and is provided solely with it, when multiple products are sourced in the same manner, or when the total price of differently sourced products is negligible.

As a general rule, a transaction that includes both taxable and non-taxable items is taxable if the non-taxable items are not separately stated or if they are incidental. However, if these non-taxable items are separately listed on the invoice and are not incidental to the taxable items, these items are exempt from sales and use tax.

E-Commerce Framework

Since October 2018, any remote seller, whether an individual or a business, that sells directly to consumers in Alabama and exceeds the USD 250,000 threshold of total retail sales delivered into the state in the previous calendar year is required to collect and remit taxes on their in-state sales.

However, remote sellers may also make indirect sales to consumers by using services provided by marketplace facilitators. Those sellers are commonly referred to as marketplace sellers, and they are subject to specifically developed rules and regulations.

Marketplace Rules

Marketplace sellers may be restaurants, grocery stores, beverage stores, other retail businesses, and individuals selling products through a marketplace facilitator platform. In cases where the marketplace facilitator is registered, collects, and remits sales tax on behalf of the marketplace sellers, the sellers are relieved of that duty. However, if marketplace sellers make sales to consumers in Alabama through a marketplace facilitator platform that is not liable for sales tax, the responsibility for collecting and remitting sales tax remains with the sellers.

Similarly, if marketplace sellers make sales through both registered marketplace facilitators and other channels, such as their website or online store, they are liable for sales tax on any sales made outside the marketplace facilitators' platform.

Digital Goods and Services

In Alabama, computer software is treated as a tangible good and is subject to sales and use tax. Moreover, regardless of whether sold, licensed, or transferred, software is generally considered a retail sale, and sales and use tax applies irrespective of its function or delivery method.

Development or modification of computer software for a customer’s specific needs, when separately stated on the invoice, is considered professional services and is not subject to tax. However, the provider must pay tax on any tangible property used to deliver the software.

If software maintenance agreements cover services such as support, bug fixes, upgrades, manual revisions, and training, and those services are required for the sale of software, the entire maintenance fee is taxable. On the contrary, if these services are optional, only charges for upgrades or new manuals are taxable, while separately stated consultation, support, error correction, and training fees are not.

Furthermore, the sale of digital photographs, blueprints, and similar items is subject to sales or use tax. Therefore, digital goods are generally considered taxable in the state of Alabama.

Digital Marketplace

To understand rules applicable to marketplace facilitators, it is first necessary to clarify which individuals or businesses are considered as facilitators. Any individual or business that helps marketplace sellers sell their products through a marketplace they operate may be viewed as a facilitator if it meets specific criteria. 

Helping marketplace sellers involves activities such as facilitating transactions between buyers and sellers, managing the platform’s infrastructure, providing virtual currency for purchases, and developing related software. Additionally, handling tasks such as payment processing, storage, order fulfillment, product listings, pricing, branding, advertising, customer service, and managing returns or exchanges are also part of the activities performed by the marketplace.

Digital Platform Operator

Since 2019, those who meet defined criteria are considered marketplace facilitators and are liable for sales and use tax if their own or facilitated sales exceed the USD 250,000 sales tax registration threshold. Once registered, marketplace facilitators must collect and remit taxes on all taxable sales made through their platform, even for sellers who would usually handle their tax obligations.

Filing and Payment Requirements in Alabama

Sales and use tax filing and payment frequency is monthly, quarterly, semiannually, and annually. Typically, the monthly tax returns are required. However, if the tax liability is below USD 2,400, a quarterly tax return may be allowed. Furthermore, if tax liability is less than USD 1,200, taxable persons may apply for a semiannual tax return filing. 

Taxable persons may request an annual tax return filing frequency if their entire tax liability for the previous calendar year was less than USD 600. Annual tax filing may be requested by taxable persons if, during the 30 consecutive days in the preceding calendar year, they had no sales.

Penalties for Non-Compliance with Sales and Use Tax Requirements

Failure to comply with tax return filing deadlines may result in a penalty of 10% of the tax required to be paid or USD 50, whichever is higher. Failing to make a timely payment of due taxes may result in the imposition of a 10% penalty on the owed taxes. In addition to these penalties, a quarterly interest rate of 7% is calculated.