The Alabama Supreme Court ruled in May 2019 that the sale of custom computer software and related equipment is subject to the state’s sales tax. The court decided that all software is tangible personal property and subject to sales tax in the state of Alabama. Previously, only canned software was categorized as tangible personal property and subject to sales tax. Custom computer software was nontaxable.
In addition, the court clarified that while the gross amount charged for the software is taxable, other related services may be nontaxable if these services are separately stated on invoices.
As the Alabama Department of Revenue determines how to enforce this decision, technology businesses making sales into Alabama should review these transactions to identify any new sales tax liabilities. Make sure that invoices list software sales separately from any additional, nontaxable services. And keep an eye on the Alabama Department of Revenue to see if this decision is applied retroactively.
Finally, it appears that for now the state will continue to recognize Software as a Service (SaaS) as nontaxable. We will watch to see if this position changes.
For information about more new sales tax obligations that impact technology companies, view our complimentary on-demand webinar:
Visit the Cherry Bekaert website for more or to get answers to your questions.
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