Should you collect sales tax in Alabama?
Sales tax is levied when you earn revenues on any goods or services provided to your customers. However, you will collect the sales tax if you determine the nexus in Alabama. A nexus is a presence that may come physically or economically.
A physical nexus is typically created when your business has a store, warehouse, or office location in Alabama. An economic nexus is intertwined when you cross paths with threshold limits as already stipulated by the state. These thresholds are based on revenue.
Let’s explore if your business has a Physical nexus in Alabama.
A physical nexus is integrated when your business is engaged in the following in Alabama:
- Leasing or owning any physical property in Alabama.
- Maintaining, occupying or using a place of business or an office in Alabama.
- Employing or retaining any contractor, including an agent, representative, or salesman, by whatever name is called.
- Remote entity nexus, as detailed by the Alabama Department of Revenue.
- Having a distribution place in Alabama.
You may also refer to the Alabama Revenue Department advisory to know more about business activities that may create a physical nexus within the state.
Is it constituting an Economic nexus in Alabama?
You are required to comply and register under sales tax rules if your retail business sales in Alabama exceed $250,000 per year during the previous calendar year. Although this rule came into force in January 2016, it was applied prospectively on October 1, 2018. Retail sales include taxable and non-taxable sales made directly by the seller.
For more detailed guidance on economic nexus, please read rule 810-6-2-.90.03 issued by the Department of Revenue of Alabama.
How can you Register for Sales tax in Alabama?
You must use My Alabama Taxes (MAT) to apply for a tax registration and obtain a tax account number in Alabama. Once you apply online for sales tax registration, receiving an account number generally takes 3-5 days.
Businesses that sell beer, wine or tobacco would need a surety bond of $25,000 to obtain a sales tax license. Additionally, before applying for a new tax account number, make sure you have the following information handy:
- Personal and Business IDs (SSN, EIN, etc.).
- Business starts date.
- Bonds and licenses as applicable.
- IRS form 8832.
- Contact information
There is no general fee to get a sales tax permit in Alabama.
Is your product or services liable to Sales tax in Alabama?
Tangible Property: Sales tax in Alabama is imposed on the retail sale of tangible personal property by businesses with an economic or physical nexus in the state. The seller collects the tax and remits it to the state directly.
Digital Product: Alabama charges sales tax on digital products. So, if you sell digital products such as software, streaming services, e-books, etc., you must collect sales tax. Read here for more details.
SAAS: SAAS is software that allows users to connect to the cloud and use it over an internet connection. It is taxable in Alabama. Click here for the guidance issued by the state.
Services: Services are generally not liable to sales tax in Alabama, with a few exceptions. Read the sales tax rules for more guidance.
Withdrawals are also subject to sales tax; their cost is reported on the sales tax return. Withdrawals are items purchased and withdrawn by the owner/employees for their use instead of being sold.
The state grants a few exemptions from sales tax, such as prescription drugs, gasoline, and motor oil.
You can read further by visiting the department website to find exactly what’s included in your list of items that must pay sales tax.
How should you collect and calculate state taxes in Alabama?
Collecting and computing accurate sales tax to be remitted to the state may involve stratospheric efforts, especially when you are not Alabama-based. The sales tax is destination-based in Alabama, which means you must collect taxes on tangible property sold to buyers based in Alabama.
However, there are complexities involved where you have a business nexus even if you are not located in the state. Any default may lead to severe concerns, penalties, or fines by the state. That is what TaxDo is here for you! Our specialized sales tax calculator and professional services will make your job super easy and lighten your compliance burden.
Alabama has a base sales tax rate of 4%, followed by local tax rates that vary by city and municipality. The sales tax rates page on the Alabama revenue department website provides more information.
Below is the simple formula you can use to calculate your sales tax collection on each merchandise sold:
Sales Tax collectible = Sale value * (4% plus local tax rate)
Do you need to collect sales tax on Shipping Charges?
Shipping charges can be delineated separately in the sale invoice raised to the customer or dissipated within the selling price of the items sold. If shipping charges are separately stated on the invoice, there will be no tax applicability; however, you need to collect the tax on the full sales price, including shipping charges, if not stated separately. Refer to the guidance issued by the state here.
How should you file sales tax in Alabama?
Sales taxes are to be filed electronically through My Alabama Taxes ONE SPOT. You need to pay the sales tax through EFT if the tax payable exceeds $750, or you can pay by mailing the cheque to the Department of Revenue.
Note: For EFT, you must transmit the EFT payment information by 4 p.m. (central time) on or before the due date to be considered timely paid.
Filing frequencies and due dates
You need to file the sales tax monthly, which is due on the 20th of the following month. However, when your sales tax liability is below $2,400 during the previous calendar year, you can request a quarterly filing status.
Similarly, you can request bi-annual filing if your tax liability during the preceding calendar year was below $1,200. You can also ask for bi-annual reporting if you make sales during up to two 30-consecutive-day periods during the previous year.
Furthermore, you can ask for annual filing if your tax liability was at most $600 during the previous calendar year.
Alabama has two sales tax holidays i.e. Back-to-School and Severe Weather Preparedness. Click here for more details.
Note: If you want to ask or request to change the filing frequency from monthly to quarterly, bi-annually or annually, you must request the change before February 20. Visit the sales tax page on the Alabama Department website for more information.
Are there any fines or penalties for default in filing or paying sales tax?
The state levies a penalty amounting to a higher of 10% of sales tax due or $50 if you default in filing the sales tax. Similarly, the penalty for default in tax payment is 10% of the sales tax due.
In addition to the penalty, you will be liable to pay the interest at prevailing rates at the time of filing or payment. Please visit the sales tax department website to know the interest rates.