WHICH GOODS AND SERVICES ARE TAXABLE?
Determining whether or not the products or services your company sells are taxable in Alabama is the first step in sales tax compliance.
Traditional Goods or Services
Goods that are subject to sales tax in Alabama include physical property like furniture, home appliances, and motor vehicles.
Prescription medicine and gasoline are both tax-exempt.
Some services in Alabama are subject to sales tax. For a detailed list of taxable services view this PDF from the Alabama Department of Revenue website.
The Alabama Department of Revenue has also published a comprehensive guide to sales tax exemptions and exclusions.
Digital Goods or Services
A digital good or service is anything electronically delivered, such as an album downloaded from iTunes or a film purchased from Amazon.
Alabama requires businesses to collect sales tax on the sale of digital goods or services.
HOW TO REGISTER FOR ALABAMA SALES TAX
If you determined that you need to charge sales tax on some or all of the goods and services your business sells, your next step is to register for a seller's permit. This allows your business to collect sales tax on behalf of your local and state governments.
In order to register, you will need the following information:
- Personal identification info (SSN, address, etc.)
- Business identification info (EIN, address, etc.)
- Business entity type
- Date started doing business in Alabama
Save Money with a Resale Certificate
With a resale certificate, also known as a reseller's permit, your business does not have to pay sales tax when purchasing goods for resale.
COLLECTING SALES TAX
After getting your seller's permit and launching your business, you will need to determine how much sales tax you need to charge different customers. To avoid fines and the risk of costly audits, it's important for business owners to collect the correct rate of sales tax.
When calculating sales tax, you'll need to consider the following kinds of sales:
- Store Sales
- Shipping In-State
- Out-of-State Sales
For traditional business owners selling goods or services on site, calculating sales tax is easy: all sales are taxed at the rate based on the location of the store. Here’s an example of what this scenario looks like:
Mary owns and manages a bookstore in Huntsville, Alabama. Since books are taxable in the state of Alabama, Mary charges her customers a flat-rate sales tax of 9% on all sales. This includes Alabama’s state sales tax rate of 4%, Madison County’s sales tax rate of 0.5%, and Huntsville’s local district tax rate of 4.5%.
The state of Alabama follows what is known as a destination-based sales tax policy. This means that long-distance sales within Alabama are taxed according to the address of the buyer. This policy applies to state, county, and city sales taxes.
Consider the following example:
Steve runs his own business selling electronics on eBay out of his home in Dothan, Alabama. A customer living in Gadsden, Alabama finds Steve’s eBay page and purchases a $350 pair of headphones. When calculating the sales tax for this purchase, Steve applies the 4% state tax rate for Alabama, the 4% city sales tax for Gadsden, Alabama and the local county tax rate of 1%. At a total sales tax rate of 9%, the total cost is $381.50 ($31.50 sales tax).
Alabama businesses only need to pay sales tax on out-of-state sales if they have nexus in other states. Nexus means that the business has a physical presence in another state.
Common types of nexus include:
- A physical location, such as an office, store, or warehouse
- An employee who works remotely or who is a traveling sales representative
- A marketing affiliate
- Drop-shipping from a third party seller.
- A temporary physical location, including festival and fair booths.
FILE YOUR SALES TAX RETURN
Now that you’ve registered for your Alabama seller's permit and know how to charge the right amount of sales tax to all of your customers, you are all set to file your sales tax return. Just be sure to keep up with all filing deadlines to avoid penalties and fines.
Recommended: Hiring a business accountant can help your business file tax returns as well as issue payroll and manage bookkeeping. Schedule a consultation with a business accountant today to save thousands of dollars on your taxes.
How to File
Alabama requires businesses to file sales tax returns and submit sales tax payments online.
How Often Should You File?
How often you need to file depends upon the total amount of sales tax your business collects.
- Annual filing: If your business collects $120 or less during the previous calendar year, your business should elect to file returns on an annual basis.
- Quarterly filing: If your business collects below $2400 during the previous calendar year, your business should elect to file returns on a calendar quarterly basis.
- Monthly filing: If your business does not vote or does not qualify for either of the latter options, your business will, by default, file returns on a monthly basis.
All sales tax return deadlines fall on the 20th day of the month, unless it is a weekend or federal holiday, in which case the deadline is moved back to the next business day. Below is a list of this year’s filing deadlines:
Annual filing: 20th day of the previous year’s filing month
- Q1 (Jan. - Mar.): April 20
- Q2 (April - June): July 20
- Q3 (July - Sept.): October 22
- Q4 (Sept. - Nov.): January 22
Monthly filing: The 20th of the following month, or the next business day, e.g. April 20th for the month of March, or May 22nd for the month of April.
For a complete list of deadlines, check out the Tax Filing Calendar on the Alabama Department of Revenue website.
Penalties for Late Filing
Alabama charges a $50 fine for late filing. Returns not timely filed are subject to a “failure to timely file” penalty equal to 10% of the tax. Interest is also due at the same rate established by the Secretary of the Treasury under authority of 26 USC 6621.