Alabama, often referred to as the “Heart of Dixie,” is celebrated for its rich history and vibrant culture from the bustling streets of Birmingham to the tranquil Gulf Shores. Yet, for businesses operating within this state, understanding the nuances of
sales tax in Alabama is as crucial as understanding its diverse economic landscape.
This guide breaks down everything you need to know about Alabama’s sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Alabama’s sales tax with confidence and ease.
Sales Tax Nexus in Alabama
When a business creates either a
physical or
economic nexus, it is required to collect sales tax in Alabama.
Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Alabama include:
- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- Affiliate Nexus: You could trigger a physical nexus if you have affiliates, whether they operate online or in-person, who maintain one or more locations within Alabama.
- Receive orders from Alabama consumers by using Alabama-based broadcasters or publishers to share your advertising.
Generate sales of physical products through frequent and significant mail campaigns, especially if your business gains from services like banking, financing, debt collection, telecommunications, or marketing happening in Alabama.
- Deliver physical products within the state using vehicles the seller owns.
- Presence at Trade Show: If you attended as a customer or took orders at a trade show, you must collect sales tax at Alabama trade shows.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as
economic nexus.
Beginning October 1, 2018, the threshold for economic nexus in Alabama is $250,000 in gross revenue in the previous calendar year’s sales.
While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing sales tax nexus. To access a comprehensive list of these rules, please refer to the
governing laws for sales tax nexus requirements in Alabama.
Alabama Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Alabama.
Tangible Products
Almost all goods are
taxable in Alabama, including:
- Cosmetics
- Electronics
- Clothing
- Furniture
- Jewelry
- Home Goods
- Cigarettes and beers
- Feminine Hygiene Products – Products such as sanitary pads, tampons, menstrual sponges, menstrual cups, or other similar feminine hygiene products are still taxable in Alabama.
- Groceries – Foods that qualify for the Supplemental Nutrition Assistance Program (SNAP) are taxed at a lower rate of 3.00% starting September 1, 2023. Before that, groceries were taxed at 4% in Alabama. SNAP-eligible foods include most items for home consumption besides alcohol, tobacco, hot foods, or hot food products ready to eat immediately.
The goods that are
exempt from sales tax are:
- Prescription Medications
- Gasoline and motor oil
- Agricultural Supplies – Fertilizers, insecticides, and fungicides used for farming are exempt
- Seeds for planting
- Poultry products
Services
In Alabama, all service-based transactions, such as professional services, advertising, and cleaning services are
not subject to sales tax. However, if a service is performed as part of manufacturing or creating a new tangible item that will later be sold, sales tax may apply to that service, even if the charges for the service are listed separately from the sale price of the item.
Software-As-A-Service (SaaS)/Digital Products
SaaS is
taxable in the state of Alabama.
Digital products (i.e., ebooks, downloadable video content, computer software, mobile apps) are also
taxable.
Shipping/Handling
Shipping and handling charges in Alabama are taxable if the delivery was made by the seller’s own vehicle or in a leased vehicle. However, if the delivery is made by a common carrier or the U.S. postal service and billed as a separate item and paid directly or indirectly by the buyer, it is not taxable..
Sales Tax Permits and Licenses in Alabama
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Alabama, the next important step is getting your Alabama Seller’s Permit, also known as a
sales tax permit.
Seller’s Permit
You can register for an Alabama sales tax permit online at
My Alabama Taxes.
Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:
- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale or the expected date to start dates)
Registration fee
There is no fee to register for a sales tax permit.
Renewal
In Alabama, you must renew your sales tax permit annually through your My Alabama Taxes account.
Resale Certificate
A
resale certificate is a document that allows businesses to buy products without paying sales tax on them, as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale.
In Alabama, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items.
You can fill out the
Form ST-EX A1 Application for Sales Tax Certificate of Exemption provided by the Alabama Department of Revenue after you receive your sales tax permit. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.
Streamlined Sales Tax (SST)
The
Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. However, Alabama is not a party to this program as it’s only an advisory state, meaning it does not follow the uniform rules and definitions established by SST but has its own sales tax regulations.
Check with the Alabama Department of Revenue for the most current information on Alabama’s participation in the Streamlined Sales Tax initiative.
Calculating and Collecting Sales Tax in Alabama
Sales Tax Computation
In Alabama, sales tax isn’t just one simple rate; it’s a combination of state and local taxes, with eligible out-of-state or remote sellers having to apply first before they can start reporting, paying, and collecting the 8.00% use tax rate different from the normal sales tax rate. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs. Use TaxHero’s
Alabama Sales Tax Calculator to compute for sales tax.
Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Texas and sells to a customer in
Huntsville, AL, with a ZIP code of
35808. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
 |
SALES TAX FORMULA |
RATE |
| State: |
Alabama |
4.00% |
| County: |
Madison |
1.50% |
| District: |
Fifth |
0.00% |
| City: |
Huntsville |
0.00% |
| Combined Sales Tax Rate = |
5.50% |
|
* includes 1.00% Madison County Special Tax Rate
Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an
origin-based or destination-based state to figure out what rate to charge for sales tax.
Alabama is a
destination-based state, meaning sales tax is determined based on the buyer’s location. That means for an Alabama-based seller, sales tax is generally based on the location of the buyer when selling within the state.
For eligible out-of-state or remote sellers with economic nexus in Alabama, they must apply and be accepted first before they can start collecting the 8.00% seller’s use tax rate. For instance, if you’re selling a product from Texas to a customer in Huntsville, Alabama, where you have nexus, you’d have to apply Huntsville’s sales tax rate to that sale.
To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.
Filing and Remitting Sales Tax Returns in Alabama
The next step after collection is filing and remitting your Alabama sales tax returns. Filing and remittance can vary in frequency,
typically monthly, quarterly, bi-annually, or annually. By default, all businesses are required to file sales tax returns monthly. However:
- Quarterly filing: If you have an annual sales tax liability of less than $2,400 in the previous year;
- Bi-Annual Filing: If your annual sales tax liability was less than $1,200 in the previous year, or you only made sales during two separate periods of up to 30 days each;
- Annual Filing: If you have an annual sales tax liability of less than $600.
It’s crucial to keep accurate records of your sales and tax collections and adhere to the filing schedule set by the state to remain compliant with Alabama’s sales tax regulations.
Due Dates
In Alabama, the due date falls on the
20th day of the following month. For instance, sales tax collected in January is due by February 20th for monthly filers.
However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of April, and the May 20th deadline falls on a holiday or weekend, you’ll have until May 21st, the following business day, to submit.
Filing Sales Tax Returns
To file your sales tax return for Alabama, a few options are available:
- File online through the My Alabama Taxes website.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales tax on time as an incentive to process sales taxes promptly. Alabama’s
timely filing discount is a 2% discount for the first $400,000 of sales taxes collected and repeated, with the discount not exceeding $8,000 per month.
Sales Tax Holiday
Currently, for 2024, the planned sales tax holidays in Alabama are:
- Severe Weather Preparedness
February 23-25, 2024
Weather preparedness items, up to $60, including (but not limited to): batteries, smoke detector, fuel container, fire extinguisher
Alabama Sales Tax Penalties
Like in most states, sales tax is a big part of how Alabama generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state.
Here are the specific penalties for non-compliance with sales tax regulations in Alabama:
- Civil penalties amounting to greater of 10% of the total sales tax due or $50;
- On the criminal side, offenses can be classified as either misdemeanors or felonies, depending on the severity and specific circumstances.
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