If you’re making sales to customers in the state of Alabama, you may be responsible for collecting and remitting sales tax on those items. Of course, several transaction elements will determine your sales tax liability, including whether you have a sales tax nexus in the state and whether the items you sell are taxable under Alabama law. If it turns out that you do need to collect state and local sales tax on your sales to Alabama customers, your next step will be to determine exactly what rate applies to each individual sale.
The state of Alabama imposes sales tax at a rate of 4%. However, city, county, and other local governments can impose local sales taxes of their own, which are then added to the base state rate to get the total due at that location. Depending on the location where you’re making a sale, or the destination of your shipment, the applicable sales tax rate can be as high as 12.5%, although most fall in the range of 7% – 10%, with a statewide average of 9.24%.
There are also specific sales tax rates applied in certain circumstances, most of which relate to agricultural equipment, production equipment, and motor vehicles. For instance, a 1.5% sales tax rate applies to sales of machines used for compounding, manufacturing, or processing tangible personal property, as well as the parts and attachments for those machines. Additionally, a 3% sales tax rate applies to food purchased from vending machines.
Sales to customers in Alabama are only subject to sales tax if the seller has a significant presence, or nexus, in the state. The regulations surrounding the establishment of a sales tax nexus in Alabama are similar to those in other states, and they include:
Alabama also has a provision through which a nexus status can be triggered by a particularly close relationship between an in-state business and an out-of-state business. This generally involves sharing of a physical location by the two companies, closely related or identical business plans, very similar names and functions, or some combinations of these attributes.
Starting in October 2018, a 2016 law formally went into effect in Alabama requiring remote sellers to register and collect sales tax through the Alabama Simplified Sellers Use Tax Program (SSUT) if they make sales of $250,000 or more of tangible personal property. Section 40-23-67 also outlines some additional situations in which remote sellers must maintain tax compliance to sell in the state.
State tax in Alabama generally applies to all sales of tangible personal property, including groceries and many medications. Purchases made with food stamps are exempt from sales tax, as are those of certain drugs, some farm equipment and supplies, and livestock. Most services are not taxed in Alabama, the main exception being those involved in the production of tangible personal property.
Shipping and delivery charges are only taxable if the delivery is made in the seller’s own vehicle or one they’ve leased. Deliveries through common carriers do not incur sales tax on shipping costs as long as those costs are listed separately on the invoice or receipt and they’re paid directly or indirectly by the purchaser.
Alabama has two sales tax holidays each year, and during these, the state sales tax is waived on qualifying items. Local governments can choose whether or not to participate in these events, and so those local tax rates may still apply.
Before you begin collecting sales tax on purchases from Alabama customers and meet tax compliance guidelines, you need to register with the state and receive an Alabama Sales Tax Number. Registration is free and can be done most conveniently online, although a mail-in form is also an option. Filing of sales tax returns must be done online, however, and it’s also free through the Department of Revenue website.
When you register online, as long as you opt to have your tax ID number delivered to you via email, you should have it within two or three days of submitting your application. At that point, you’re eligible to begin making taxable sales to Alabama customers.
The state administers sales tax collection in over 200 local jurisdictions, but that does not account for all of the localities in the state. Depending on the location of your business or the destination of a shipment, you may need to register and file returns with the local government as well. These are due on the same schedule as your state sales tax returns.
Alabama tax returns and payments are due monthly on the 20th of the month following the one for which the taxes were collected. If your sales tax liability for the previous calendar year was less than $200 per month on average, you can elect to file quarterly, and you must notify the Department of Revenue of your intent in writing no later than February 20th. Any sellers with an annual sales tax liability of less than $10 for the previous calendar year may file annually, with their return due on January 20th for the previous year. Any payments of $750 or more must be made through electronic funds transfer (EFT).
|January – March (Q1)||April 20th|
|April – June (Q2)||July 20th|
|July – September (Q3)||October 20th|
|October – December (Q4)||January 20th|
If you miss the deadline for filing your return, you will be assessed a 10% penalty on the total tax due or $50, whichever is more. Late payment will also incur a 10% penalty, as well as an interest charge at the current applicable rate.
Alabama is one state where keeping track of and filing sales tax returns poses particular challenges, especially to sellers shipping to customers throughout the state, because of the independent sales tax jurisdictions not administered by the state government. Assuming you’re trying to service the entire state, there will be a lot of independent registrations to fill out and returns to file, as well as multiple combined sales tax rates to keep track of.
Fortunately, you can take advantage of tax calculator software like TaxTools to manage these webs of regulations. TaxTools integrates smoothly with all eCommerce platforms, so the only thing that will change about your business is the ease with which you manage your sales tax collections and file returns. TaxTools also keeps up on changes to the local tax rates and the classification of items that are taxed, so you can be sure you’re charging the right rate on the right purchases on every sale you make. Your returns will be filed online in an efficient and timely manner, and you will have immediate access to clear reports detailing your taxable sales along with location information and other pertinent data.
Last updated June 2022