Sales and use tax in Alabama
There are two key tax types businesses selling goods and services in Alabama should be well-versed in: sales tax and use tax. Businesses should be well versed in both to be sure to stay compliant with Alabama state and local tax laws. This guide aims to assist by summarizing key tax topics in an easy to read format.
Alabama sales tax overview
Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Alabama first adopted a general state sales tax in 1936, and since that time, the rate has risen to 4 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0 percent and 7 percent. Currently, combined sales tax rates in Alabama range from 4 percent to 11 percent, depending on the location of the sale.
As a business owner selling taxable goods or services, you act as an agent of the state of Alabama by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Alabama is administered by the Alabama Department of Revenue (DOR).
Any sales tax collected from customers belongs to the state of Alabama, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.
Alabama use tax overview
Use tax may apply to businesses, individuals, or nonprofits that don't have an exemption granted by the Alabama DOR and attempts to level the playing field for purchases that avoid sales tax. Use tax is one of the most overlooked and misunderstood taxes. Two types of use tax exist, sellers use tax and consumers use tax.
Sellers use tax is a transaction tax. It is determined by applying the use tax rate (equal to the sales tax rate) to the purchase price of qualifying goods and services. Generally speaking, a business is required to pay sellers use tax if the following two conditions are satisfied:
- No tax was collected on a sale that qualifies for sales tax in Alabama.
- A business in Alabama uses, gives away, stores, or otherwise consumes a taxable item that was purchased tax-free.
To determine the amount of sellers use tax owed, the retailer should apply the sales tax rate where the item is used, stored, or otherwise consumed to the total purchase price.
Sellers use tax may also be referred to as "retailers use tax" or a "vendors use tax".
Consumers use tax is typically imposed on taxable transactions where sales tax was not collected. A good example is an taxable online purchase where the retailed fails to collect sales tax. The responsibility shifts from the seller to the buyer who can report, file, and remit total use tax on their annual Alabama income tax return.
In some cases, an out-of-state purchase may be taxed at a sales tax rate different from that in Alabama. If the consumer paid a higher, out-of-state tax rate, the Alabama DOR allows them to claim a credit. If they paid a lower out-of-state tax rate, the Alabama DOR expects them to report, file, and remit the difference.
When do businesses need to collect Alabama sales tax?
In Alabama, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.
To help you determine whether you need to collect sales tax in Alabama, start by answering these three questions:
- Do you have nexus in Alabama?
- Are you selling taxable goods or services to Alabama residents?
- Are your buyers required to pay sales tax?
If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
The impact of failing to collect Alabama sales tax
If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.
It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.
Learn about sales tax automation
Introducing our Sales Tax Automation 101 series. The first installment covers the basics of sales tax automation: what it is and how it can help your business.
Triggering Alabama sales tax nexus
The need to collect sales tax in Alabama is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
While physical presence still triggers a sales tax collection obligation in Alabama, it’s now possible for out-of-state sellers to have sales tax nexus with Alabama.
Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:
Affiliate nexus: Having ties to businesses or affiliates in Alabama. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise. At this time, Alabama has not enacted a click-through nexus law.
Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after January 1, 2016, a remote seller must register with the state then collect and remit Alabama sales tax if their retail sales of tangible personal property sold into Alabama exceed $250,000 per year based on the previous calendar year’s sales
Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Alabama in a warehouse owned or operated by Amazon.
Marketplace sales: Marketplace facilitators (e.g., Amazon, eBay, or Etsy) that make $250,000 or more in sales in Alabama during the preceding 12 months must:
- Collect and remit an 8 percent simplified sellers use tax on all sales made through their marketplace by or on behalf of a marketplace seller; or
- Comply with non-collecting seller use tax reporting and customer notification requirements
Trade shows: Attending conventions or trade shows in Alabama. You’re required to register for a seller’s permit any time you make sales in Alabama, even if it’s only at a specific event. However, you generally would not create nexus if you’re in the state solely to engage in convention or trade show activities, so long as you aren’t making sales.
If you have sales tax nexus in Alabama, you’re required to register with the Alabama DOR and to charge, collect, and remit the appropriate tax to the state.
For more information, see Alabama Department of Revenue Sales and Use Tax Guidance for Online Sellers, Alabama Sales and Use Tax FAQ, and Section 40-23-68.
Non-collecting seller use tax reporting
The Alabama Department of Revenue requires certain non-collecting sellers to notify customers about their potential use tax liability, provide customers with an annual purchase summary, and provide the state with a customer information report. For more information about the precise nature of these requirements, see Alabama Senate Bill 86.
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of September 2019, Alabama does not have an explicitly defined trailing nexus policy.
Fulfillment by Amazon (FBA)
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Alabama.
If you sell taxable goods to Alabama residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
Sourcing sales tax in Alabama: which rate to collect
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).
Alabama is a destination-based state. This means you’re responsible for applying the sales tax rate determined by the ship-to address on all taxable sales. However, eligible sellers may participate in Alabama’s Simplified Sellers Use Tax (SSUT) program, which enables them to collect, report, and remit a flat 8 percent sellers use tax on all sales made into Alabama. For more information, see the Alabama Department of Revenue Simplified Sellers Use Tax.
Registering a business in Alabama
After determining you have sales tax nexus in Alabama, businesses will need to register with state and local tax authorities for any necessary business licenses or permits. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Alabama business license and sales tax registration.
How to register for an Alabama seller's permit
You can register for an Alabama seller’s permit online through the Alabama DOR. To apply, you’ll need to provide the Alabama DOR with certain information about your business, including but not limited to:
- Business name, address, and contact information
- Federal EIN number
- Date business activities began or will begin
- Projected monthly sales
- Projected monthly taxable sales
- Products to be sold
Cost of registering for an Alabama seller's permit
There is currently no cost to register for a seller’s permit in Alabama; however, other business registration fees may apply.
Acquiring a registered business
You must register with the Alabama Department of Revenue if you acquire an existing business in Alabama. The state requires all registered businesses to have the current business owner’s name and contact information on file.
Streamlined Sales Tax (SST)
The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).
As of September 2019, Alabama is not an SST member state.
Collecting sales tax
Once you've successfully registered to collect Alabama sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the Alabama Department of Revenue, and keep excellent records. Here’s what you need to know to keep everything organized and in check.
How you collect Alabama sales tax is influenced by how you sell your goods:
Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.
Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Alabama sales tax collection can be managed.
Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.
Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.
Alabama sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.
Some goods are exempt from sales tax under Alabama law. Examples include most non-prepared food items, purchases made with food stamps, and prescription drugs.
We recommend businesses review Section 40-23 of the Code of Alabama 1975 for information on which goods are taxable and which are exempt, and under what conditions.
Some customers are exempt from paying sales tax under Alabama law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.
Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.
Misplacing a sales tax exemption/resale certificate
Alabama sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the Alabama Department of Revenue may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.
Sales tax holidays
Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.
As of September 2019, Alabama has the following tax holidays scheduled:
- Severe Weather Preparedness, Friday–Sunday of the last full weekend in February
- Portable generators priced $1,000 or less
- Variety of supplies priced $60 or less
- Portable generators priced $1,000 or less
- Back-to-School, beginning the first Friday in August and ending the following Sunday
- Clothing priced $100 or less
- Computers, computer software, and school computer supplies priced $750 or less
- School supplies priced $50 or less
- Books priced $30 or less
- Clothing priced $100 or less
Filing and remittance
You're registered with the Alabama Department of Revenue and you've begun collecting sales tax. Remember, those tax dollars don't belong to you. As an agent of the state of Alabama, your role is that of intermediary to transfer tax dollars from consumers to the tax authorities.
How to file
Once you’ve collected sales tax, you’re required to remit it to the Alabama Department of Revenue by a certain date. The Alabama Department of Revenue will then distribute it appropriately.
Filing an Alabama sales tax return is a two-step process comprised of submitting the required sales data (filing a return) and remitting the collected tax dollars (if any) to the Alabama DOR. The filing process forces you to detail your total sales in the state, the amount of sales tax collected, and the location of each sale.
Alabama forms AL-2100 and AL-9501 are no longer available. Taxpayers should use the My Alabama Taxes (MAT) portal to file sales and use tax returns. Rule 810-1-6-.01("Electronic Filing and Payment Through Department Provided Filing and Payment Systems") mandates electronic filing.
The Alabama Department of Revenue will assign you a filing frequency. Typically, this is determined by the size or sales volume of your business. State governments generally ask larger businesses to file more frequently. See the filing due dates section for more information.
Alabama sales tax returns and payments must be remitted at the same time; both have the same due date.
You may file directly with the Alabama DOR by visiting their site and entering your transaction data manually. This is a free service, but preparing Alabama sales tax returns can be time-consuming — especially for larger sellers.
Using a third party to file returns
To save time and avoid costly errors, many businesses outsource their sales and use tax filing to an accountant, bookkeeper, or sales tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about Alabama sales tax code.
Avalara Returns for Small Business is an affordable third-party solution that helps business owners simplify the sales tax returns process and stay focused on growing their business. Learn how automating the sales tax returns process could help your business. See our offer to try Returns for Small Business free for up to 60 days. Terms and conditions apply.
Filing when there are no sales
Once you have an Alabama seller's permit, you’re required to file returns at the completion of each assigned collection period regardless of whether any sales tax was collected. When no sales tax was collected, you must file a "zero return.”
Failure to submit a zero return can result in penalties and interest charges.
Closing a business
The Alabama DOR requires all businesses to "close their books" by filing a final sales tax return. This also holds true for business owners selling or otherwise transferring ownership of their business.
Timely filing discount
Many states encourage the timely or early filing of sales and use tax returns with a timely filing discount.
As of September 2019, the Alabama DOR offers a discount of 5 percent on the first $100 and 2 percent on all tax over $100. The monthly discount may not exceed $400.
Filing due dates
It's important to know the due dates associated with the filing frequency assigned to your business by the Alabama Department of Revenue. This way you'll be prepared and can plan accordingly. Failure to file by the assigned date can lead to late fines and interest charges.
The Alabama DOR requires all sales tax filing to be completed by the 20th of the month following the tax period. Below, we've grouped Alabama sales tax filing due dates by filing frequency for your convenience. Due dates falling on a weekend or holiday are adjusted to the following business day.
Local administered sales tax is due monthly. For sales tax administered by the state and depending on the total amount of sales tax collected during the preceding calendar year, the Alabama DOR offers three options for filing sales tax returns:
- Filing Quarterly: If the taxpayer is liable for less than an average of $200 per month during the preceding calendar year, they may to file their sales tax returns quarterly on or before the 20th day of April, July, October, or January.
- Filing Annually: If the taxpayer is liable for less than $200 in sales tax during the preceding calendar year, they may elect to file their sales tax return annually
Filing an Alabama sales tax return late may result in a late filing penalty as well as interest on any outstanding tax due. For more information, refer to our section on penalties and interest.
In the event an Alabama sales tax filing deadline was missed due to circumstances beyond your control (e.g., weather, accident), the Alabama DOR may grant you an extension. However, you may be asked to provide evidence supporting your claim.
Penalties and interest
Hopefully you don't need to worry about this section because you're filing and remitting Alabama sales tax on time and without incident. However, in the real world, mistakes happen.
If you miss a sales tax filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit collected tax on time may result in penalties and interest charges, and the longer you wait to file, the greater the penalty and the greater the interest.
If you’re in the process of acquiring a business, it’s strongly recommended that you contact the Alabama DOR and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding Alabama sales and use tax liability.
Shipping and handling
If you’re collecting sales tax from Alabama residents, you’ll need to consider how to handle taxes on shipping and handling charges.
Taxable and exempt shipping charges
Delivery charges are generally taxable when the delivery is made in a vehicle leased or owned by the seller, even when the charges are billed separately. Transportation charges for shipments made by the post office or common carrier are exempt when separately stated and paid by the consumer, either directly or indirectly.
There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in Alabama and sales tax should be taken directly to a tax professional familiar with Alabama tax laws.
For additional information, see Rule 810-6-1-.178.