This alert explains how Alabama approaches sales and use tax, beginning with the basic structure of state and local taxation and the distinction between sales tax, use tax, and the state’s Simplified Seller’s Use Tax program. It outlines the economic nexus rules that determine when out-of-state sellers become responsible for collecting Alabama tax, along with a clear list of which transactions count toward the threshold and which do not. The blog then brings together all filing requirements into one combined section. It covers the forms commonly used in Alabama, the process for refunds and credits, and the criteria for annual, quarterly, or bi-annual filing. It also explains due dates and the documentation Alabama expects from taxpayers. A detailed section on resale certificates shows how Alabama treats its sales tax license as the resale exemption certificate. It explains how long the license lasts, how sellers rely on it for repeated resale transactions, and how buyers and sellers typically maintain documentation. The blog also breaks down taxable and exempt transactions with simple examples, including how invoicing affects taxability and which manufacturing-related items qualify for exemption. It closes with an overview of the broader sales tax series released by M2K Advisors, pointing readers toward the upcoming alerts and the states already included.
Introduction & Economic Nexus
Alabama imposes sales tax on the retail sale of tangible personal property. The state rate is 4 percent, but once local taxes are added, the combined rate can be as high as 11 percent. Because each city and county can impose its own rate, businesses selling across the state often deal with a patchwork of tax amounts depending on where the transaction is sourced. To simplify life for remote sellers, Alabama offers the Simplified Seller’s Use Tax program. Instead of tracking hundreds of local jurisdictions, out-of-state sellers without a physical presence in Alabama can choose to collect a flat 8 percent tax. They remit it as a single amount, which removes the need to manage varying local rates. Remote sellers may either follow this simplified path or stick to the regular rules depending on what fits their operations. Use tax applies when tangible personal property is brought into Alabama for storage, use, or consumption and the seller did not collect seller’s use tax. The use tax rate mirrors the sales tax rate: 4 percent for general items. The intent is to level the playing field so purchases brought in from elsewhere are taxed the same as purchases made within the state. Economic nexus determines when an out-of-state business becomes responsible for collecting Alabama sales tax. The threshold is 250,000 dollars in retail sales of tangible personal property delivered into Alabama. Only certain transactions count. Retail sales into the state and sales made through a non-collecting marketplace are included. Exempt sales, wholesale sales for resale, and sales through a registered marketplace facilitator are excluded. This keeps the focus on transactions meant for final consumers and avoids double counting. These rules mean remote sellers must keep close track of what they sell, how they sell it, and which channels are collecting tax on their behalf. As soon as sales approach the threshold, businesses need to plan for registration and compliance.
Filing Requirements
Alabama uses several common forms for reporting and documenting sales and use tax activity. The One Spot: Sales and Use Tax Return is the primary reporting tool. It covers taxable sales, exemptions, and deductions and is designed to let a taxpayer report multiple types of Alabama sales and use tax in one place. Filing frequency depends on sales volume. Larger taxpayers file more often, while smaller ones may qualify for less frequent reporting. For exemption documentation, Alabama uses Form ST:EX-A1 when a business applies for a Certificate of Exemption. This certificate allows qualified purchases to be made without paying tax. Form ST:EX-1 is used when a purchaser claims exemption for certain out-of-state, out-of-city, or out-of-county deliveries. Sellers keep this form on file as proof that the transaction was exempt.
Refunds require a formal petition, and Alabama recognizes two types. A Direct Petition is filed when the taxpayer believes they overpaid. A Petition for Refund of Taxes Paid to Seller applies when the seller collected tax that was not due. Alabama requires invoices, receipts, accrual records, and other documentation to support the claim, and no refund is issued without proper records.
Filing frequency depends on how much sales tax the business owed in the previous year. If liability was under 600 dollars, the taxpayer can file annually. A business that only had sales during one 30-day consecutive period can also use annual filing. Quarterly filing is available when the prior year’s liability was under 2,400 dollars. Quarterly returns are due on the twentieth day of April, July, October, and January.
Bi-annual filing is an additional option if the previous year’s liability was under 1,200 dollars. A business that made sales only during two 30-day consecutive periods may also request it. These options help small businesses avoid unnecessary monthly reporting while keeping larger taxpayers on a more frequent schedule.
Regardless of whether a business files annually, quarterly, bi-annually, or monthly, the due date stays consistent. Returns must be submitted on or before the twentieth day of the month following the reporting period. Missing that deadline can trigger penalties, so businesses need to track their cycle carefully.
Resale Certificate
Businesses purchasing goods for resale need documentation to support tax-exempt purchases. In Alabama, the sales tax license itself acts as the resale exemption certificate. Once the business completes its sales tax registration with the Department of Revenue, the license serves as proof that purchases are being made for resale.
The license is valid for 12 months and must be renewed annually. Sellers often keep a copy of a buyer’s license on file, especially when dealing with repeat purchases of the same type of property. This practice works like a blanket certificate in other states, where a single document covers multiple exempt transactions over time
As long as the buyer is properly registered and the items are truly for resale, these purchases are not subject to sales tax. Sellers simply need to retain the license in their records as proof that the exemption was legitimate in case of review.
Taxable vs exempt transactions
Alabama’s taxability rules hinge on what is being sold and how the charges appear on the invoice. Leasing and renting tangible personal property is taxable. Labor, installation, and service charges are taxable when they are not separately stated. If the invoice bundles parts and labor together, the full amount becomes taxable. Prepaid telephone calling cards and prewritten or canned software are also taxable, reflecting the state’s treatment of certain digital and prepaid items as tangible personal property.
Several categories qualify for exemption. Professional services are exempt, placing service-based activities outside the tax base. Machinery, equipment, and utilities used directly in manufacturing also qualify. Energy used by manufacturers in the manufacturing process is exempt as well. When labor and similar charges are listed separately from the sale of parts, those charges become exempt. Clear invoicing is essential because the taxability often depends on what is stated and how it is separated.
These rules highlight the practical nature of Alabama sales tax: classification, usage, and invoice structure often determine whether tax applies.
Stay tuned for more updates on Sales & Use Tax
This alert is part of a broader series released every Tuesday and Thursday. The series covers the fundamentals of sales and use tax and provides state-by-state breakdowns. Topics already released include introduction to sales and use tax, situs of sale, exemptions, nexus, registration and compliance, voluntary disclosure agreements, and sales tax on software and SaaS.
Alongside these general subjects, the series walks through all major states from Alabama to Wyoming. Anyone who missed earlier alerts can find them on the M2K Advisors website. Each alert helps readers understand their compliance obligations step by step, especially if they operate in multiple jurisdictions.
