The State of Alabama is watching you.
That is, it’s watching your business sales tax remittances. Alabama has one of the most intense and complex sales and use tax matrices. However, the Alabama Department of Revenue is also collecting feedback and working to streamline the process for in-state and out-of-state sellers, mainly by making improvements to the My Alabama Taxes (MAT) website.
Whether you set up a MAT account yourself or work with your CPA, correct account set-up is only the first phase of a sound tax strategy.
Assuming you already do a significant amount of business in Alabama (or you plan to), here are some key areas to revisit in your sales tax strategy. See if these scenarios apply to your business situation.
Do you sell within multiple Alabama zip codes?
The statewide tax in Alabama is 4%, but the state has a destination-based sales tax system, which means that tax is assessed per the locations of your buyers. Unlike many states that collect sales and use tax and then distribute tax revenue to applicable counties and cities, Alabama requires the taxpayer to make separate payments to those counties and municipalities in addition to state sales tax payments.
For online retail, for example, the taxpayer can review shipping zip codes to determine sales tax remittances for the state, as well as any applicable county or municipal sales taxes. If sales fall within the jurisdiction of a large metro area such as Birmingham, the taxpayer remits an extra local sales tax for potentially a handful of zip codes.
If your list of customers or buyers is constantly changing, you will need to update your MAT account regularly to properly pay taxes throughout the year.
Do you purchase goods in Alabama?
Some business owners purchase goods in Alabama for resale and can request a sales tax exemption certificate in certain cases for those purchases. However, for materials and products purchased for use within the business, the state has two tax rates: a general tax rate of 4% and a “machine” tax rate of 1.5%.
The machine rate is a common area for audits since it is lower than the state’s general tax rate. Only goods that go into the machining or manufacture of other goods are eligible for this lower rate. Tax agents will be thorough when reviewing the list of materials documented as “manufacturing machine” purchases. They want to make sure that purchases are being taxed at the appropriate tax rate.
When planning the manufacture of new products or when retooling machinery, pay careful attention to product inventory required for machine operations. It can be an important consideration for lowering your total business sales tax obligation. Document these purchases in detail, however, because reporting significant machining taxes may carry a higher audit risk.
Are you an out-of-state business owner?
Remote or online sellers with nexus in Alabama can choose to pay a higher sales tax rate of 8%. The benefit to a business owner is that the State of Alabama will distribute county and municipal tax payments on behalf of the business.
This option is beneficial when the out-of-state seller has buyers in multiple municipalities that require additional sales tax payments. If sales are limited to mostly non-taxing municipalities, then it is usually a smarter strategy to continue to pay local and county taxes separately and pay the lower 4% state sales tax.
With these higher tax rates, keep in mind that you may need to sell goods at higher price points in Alabama to maintain a decent margin.
Are you being audited for sales tax in Alabama?
For businesses with complex manufacturing or product sales within the State of Alabama, there is a chance that the state or a specific municipality may conduct a sales tax audit. Your sales tax strategy should include careful documentation of goods purchased, produced and/or sold within state or city limits.
Agents I have dealt with are mainly concerned with a reasonable attempt to properly remit sales tax where and when it is due. In areas where agents have questions, proper documentation can usually clear up any discrepancies. In cases where business owners have overpaid or underpaid, the state has a streamlined process to request a refund or to remit additional taxes.
As a final consideration, you or your CPA should pay attention to state sales tax legislation and updates. For example, Alabama introduced a new food and grocery sales and use tax rate in September 2023. There are also increased threshold requirements starting this year for monthly estimated sales taxes. This means that smaller businesses could get some payment and reporting relief by remitting sales and use taxes quarterly instead of monthly.
A sales tax strategy for the State of Alabama is one way to stay on top of the dynamic changes in multi-state business operations, as well as for those business owners who operate exclusively in Alabama. The state is watching. Be prepared.
Jarot Scarbrough is a manager focusing on tax planning strategies with Anglin Reichmann Armstrong CPAs and Advisors in Huntsville. He has more than a decade of experience in public accounting and leads the firm’s state and local taxation team. For more on the firm, visit www.anglincpa.com.