Avalara > Blog > Software > Alabama Supreme Court rules software is subject to sales and use tax

Alabama Supreme Court rules software is subject to sales and use tax


computer on a desk

Last month, the Supreme Court of Alabama determined that all software sold to customers in Alabama is subject to sales and use tax, including custom software created for a particular user. This is a departure from precedent. Although canned software has been considered taxable in Alabama since March 1, 1997, custom software has been treated as exempt.

The case in question began when a taxpayer sought a refund for taxes paid on purchases of computer software and equipment. The taxpayer argued the transactions should have been exempt because the software was customized. The Alabama Department of Revenue denied the request for a refund, and several appeals ensued. On May 17, 2019, the Alabama Supreme Court affirmed the decision by the Court of Appeals, finding in favor of the department in Russell County Community Hospital, LLC, d/b/a/ Jack Hughston Memorial Hospital v. State Department of Revenue.

It’s unclear at this point if the Alabama Department of Revenue will use this decision to retroactively tax sales of custom software. 

Is software tangible personal property?

Sales tax in Alabama is levied on the sale of tangible personal property, which is broadly defined as property that can be seen, weighed, measured, felt, touched, or in any other way perceived by the senses. Some states specifically include or exclude digital goods and services (e.g., canned or custom software) from the definition. Alabama sales and use tax law does neither.

Thus, the taxability of these products in Alabama is somewhat debatable. Typically, it’s based on Department of Revenue regulations, court rulings, or both. The Alabama Supreme Court has weighed in on the subject twice.

In a 1977 case involving software transferred via magnetic tapes or punched cards, the court found the discarded or returned tangible personal property to be incidental to the sale. Since the essence of the transaction was “the purchase of nontaxable intangible information,” the sale was exempt.

However, the court took a different stance in Wal-Mart Stores, Inc. v. City of Mobile (1996). It found the sale of canned software to resemble “a sale of tangible property, like the sale of a book,” and therefore it was taxable.

The Department of Revenue reinforced the Wal-Mart decision with a regulation: “Canned computer software is tangible personal property” and subject to Alabama sales, use, or rental tax as of March 1, 1997.

However, the regulation also states:

  • “Custom software programming is not subject to tax regardless of the manner or medium of transfer to the customer.”
  • “The provider of custom software programming would owe sales or use tax on the cost of the tangible medium for transferring the custom software programming to the customer.”

See 810-6-1-.37. Computer Hardware and Software for more details.

Services associated with software

Although it found all sales of software taxable, the court noted that nontaxable services “can accompany the conveyance of software.” These include:

  • Designing and programming new software for a particular use
  • Installing software
  • Modifying or configuring existing software programs to meet a particular user’s needs
  • Training users to operate software

When separately stated, the charges for the above services are exempt. Thus, although “all software is tangible personal property … subject to sales tax,” a seller can determine the taxability of the above services by including them (i.e., taxable), or separately stating them (i.e., exempt). 

A plea for clarity

Concurring, Justice Michael F. Bolin added, “I write specifically to encourage the legislature to clarify how a transaction involving software and services is to be documented and invoiced. It should not be left to private entities to determine the taxability of a transaction for the State of Alabama.”

Also concurring, Justice Sarah Hicks Stewart said, “The legislature … is best equipped to define tangible personal property and to clarify any distinctions as to what should and should not be taxed; otherwise, uncertainty for taxpayers and artful invoicing will overshadow this State’s tax policy.”

This decision may impact out-of-state sellers of customized software. Learn more about remote seller sales tax laws in Alabama.

Avalara will implement taxability changes to custom computer software codes in Alabama effective July 1, 2019.


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.