Sunday, June 23, 2019

Alabama Department of Revenue Issues Guidance on Taxability of Software

The Alabama Department of Revenue recently released its initial guidance on the taxability of sales of computer software in light of the Alabama Supreme Court's decision in Ex parte Russell County Community Hospital (May 17, 2019).  The Department's initial guidance can be found here.

The Alabama Supreme Court's decision can be found here.

In the Court's plurality opinion, the Court held that the hospital was not entitled to the refund of sales taxes claimed on the purchase of computer software.  While the majority of the justices concurred in this conclusion, only two actually participated in the main opinion that also concluded that all software, whether canned or customized is subject to sales tax in Alabama.  That conclusion stands in contrast to the Court's previous decision in Wal-Mart Stores, Inc. v. City of Mobile, 696 So.2d 290 (Ala. 1996), in which it held that customized software was not subject to sales tax.  To be clear, the Court here, while refusing to distinguish between canned and custom software, did state that charges for services for "determining a particular software user's needs, designing and programming new software for a particular user, modifying or configuring existing software programs to meet a particular user's needs, installing software, and training users to operate software," if separately stated and invoiced, are nontaxable.

It remains to be seen how the Alabama Department of Revenue alters its longstanding regulation on this issue in light of the decision in Ex parte Russell County Community Hospital.  We expect that the Department will work in the near future to rewrite Regulation 810-6-1-.37, which currently indicates that customized software is not subject to sales tax.  So, stay tuned for more on this in the coming months.

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