All computer software is taxable in Alabama, under an opinion issued Friday, May 17, by the state’s highest court.
In a split decision, the Alabama Supreme Court ruled that even customized software is taxable in our state.
“We hold that all software, including custom software created for a particular user, is ‘tangible personal property’ for purposes of Alabama sales tax,” the justices wrote in the majority opinion. Under Alabama law, sales tax is levied on the sale of tangible personal property.
Previously, off-the-shelf or what the court called “canned” software was considered taxable, and customized software was not, based on Alabama Department of Revenue regulation and court precedence.
The Supreme Court did hold that nontaxable services can accompany the sale of software, including designing, programming, modifying, installing and training.
“If the costs of such services are separately stated and invoiced, they are nontaxable,” the majority opinion stated. “Charges for the software itself trigger the imposition of sales tax at the time the sale closes and the software is transferred to the purchaser.”
The Alabama Revenue Department has not yet issued a statement on the ruling. “The department is reviewing the Alabama Supreme Court’s decision and will evaluate its existing administrative rules in relation to the case,” said Frank Miles, ADOR public information manager. “The department will be able to provide additional comments once this review is completed.”