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.
