In May 2019, the Alabama Supreme Court ruled that a series of transactions involving computer software and equipment was subject to state sales tax. This ruling is standing out as a major turn in direction due to a long-standing Alabama state regulation that defines software programming as nontaxable. While this is the hottest change in tax code around taxable software, this is a trend we are seeing with many states. Iowa made this change in January 2019. It’s important to stay educated, as many other states may continue to see changes.
Alabama law has defined “tangible personal property” as “something that can be seen, felt, handled, sold commercially and has physical substance.” In 1977 the Alabama Supreme Court found that the essence of a software transaction was the purchase of nontaxable, intangible information when the software was delivered to the user, used to program the user’s computer, then returned or discarded.
Almost 20 years later, during another court case, the Court assumed that the information is tangible once it is recorded somewhere else. Effective March 1, 1997, the Alabama Department of Revenue enacted a code formalizing its position that canned computer software is tangible personal property, subject to Alabama’s sales tax, while also stating that “custom software programming is not subject to tax regardless of the manner or medium of transfer to the customer” because it represents a service and not “tangible personal property.”
In the May 2019 case involving a hospital’s purchase of a custom software, the courts concluded that all software is tangible personal property for Alabama’s sales tax purposes, whether it is custom or canned. To note, the gross amount charged for the software is subject to sales tax while related services that are stated are not subject to sales tax.
Whether you purchase canned or custom software for your business or personal technology use, it’s important to evaluate your transactions to determine the extent of any potential additional sales tax liability. It’s also important to ensure that nontaxable items in addition to your software sales are separately stated on invoices so you are not paying more than you should.
Technology is a confusing and ever-changing world. Have you made a software purchase in recent years and are unsure if this could affect you? BerganKDV can help you navigate changing sales tax landscape. Want to learn more about what we can do for you? Start here.