Credit Card Transaction Fees No Longer Subject to Sales Tax

The Alabama Department of Revenue has issued an amendment to a sales tax regulation that reflects recent change in Alabama law that, effective as of September 1, 2026, the amount of any credit card transaction fee charged for an electronic payment transaction is to be excluded from the tax base on which sales and use tax is calculated and assessed for that electronic payment transaction. Specifically, the amended rule provides that “to be excludable from the measure of sales and use tax,” the credit card transaction fee must be “separate and identifiable from other charges.”  Amended Regulation here.

Department Issues Notice on Nonresident Employee Withholding

The Alabama Department of Revenue posted a notice on August 25, 2026, (ADOR Notice) which explains that an employer generally must withhold Alabama income tax from wages paid to a nonresident employee to the extent the wages are attributable to services physically performed in Alabama, and that if a nonresident employee performs no services in Alabama during the year, Alabama income tax withholding is not required solely because the employer is located in Alabama. 

The Department references Alabama’s relatively new statutory exemption providing a 30-day safe harbor which exempts Alabama earnings from taxation for certain out-of-state workers performing services in Alabama for 30 or fewer days in a calendar year. 

The Department also states in the notice that it will not follow the Alabama Tax Tribunal’s Final Order in Bollinger v. Department of Revenue, Docket No. INC. 22-390-LP (March 8, 2023), involving a nonresident remote worker “to the extent that ruling is inconsistent” with this notice.

Alabama Tax Tribunal Provides Clarification on Refund Statute of Limitations

In an Opinion and Preliminary Order in SLJ Holdings, Inc. v. State of Alabama Department of Revenue; Docket Nos. S. 23-618-LP, S. 24-0469-LP, and  S. 24-0470-LP (December 11, 2025), the Alabama Tax Tribunal concluded a taxpayer was entitled to the reduced machine rate on certain purchases of propane and oxygen, and also provided clarification on the applicable statute of limitations for refund claims for sales tax.

SLJ Holdings, Inc., formerly Jordan Scrap, Inc., filed a refund petition for sales tax on propane and oxygen purchases from February 2020 to October 2022. The Alabama Department of Revenue denied the refund, citing a two-year statute of limitations and the determination that the gas purchases did not qualify for the reduced machine rate.

The Department argued that about half of the refund claims were outside of the two-year statute of limitations that the Department applied, since the Taxpayer did not and was not required to file a return for the tax at issue. The Department’s position was that the three-year statute of limitations could not apply. Under Alabama law, the statute of limitations for filing a refund petition is either three years from the date the return is filed or two years from the date of payment of the tax, whichever is later. 

The Tribunal disagreed with the Department and held that the Taxpayer had three years from the date of filing of the return by the gas vendors, if timely, to file the refund claims. However, the burden of proving timely filing is on the Taxpayer.

The Tax Tribunal then examined whether the propane and oxygen purchases qualified for the machine rate, which applies to items used in manufacturing processes. The propane purchased was used in a piece of equipment similar to a blow torch, and the Department determined the torch to be a hand tool, not a machine. The Department understood the torch to be used to dismantle large structures, such as bridges, buildings, and boats, and not for manufacturing. Also at issue were taxes paid on purchases of oxygen, which was used in the same process as the propane purchased.

The Taxpayer argued the tools were used to cut metal for marketability, which constitutes processing, and that equipment used for dismantling structures did not involve the gas purchases for which refunds were sought. The Tribunal concluded that the gas purchases qualify for the machine rate, reversing the Department's denial related to the application of the machine rate. However, the Tribunal noted the Taxpayer must provide proof of timely filing of the tax returns in order to avail itself of the three-year refund window.

To read the full Opinion and Preliminary Order, click here.

Alabama Legislature Approves Tax Breaks; Await Governor's Signature

The Alabama Legislature has now approved and sent to Governor Ivey legislation to further reduce the state sales tax on food. Previously, the Legislature had reduced the rate from 4% to 3%. Assuming Governor Ivey signs the current legislation, the rate will drop from 3% to 2% beginning on September 1, 2025. To see the legislation, click here.

The Legislature also passed legislation that removes the state's 4% sales tax on baby care, feminine hygiene, and maternity products. For details on the items exempted, in addition to diapers and baby formula, click here. 

Also passed was a new dollar-for-dollar tax incentive program for individuals and businesses that donate money to rural hospitals. The Rural Hospital Investment Program has an annual statewide cap of $20 million for 2026, $25 million for 2027, and $30 million for 2028. The law requires a 10% match from local communities, in cash or of in-kind services. The tax credit ends in three years unless extended by the Legislature. For details, click here.

Finally, lawmakers gave final approval to legislation that exempts remote workers from the state's income tax under certain circumstances, including working in the state for 30 days or less per year. For more, see the legislation by clicking here.

Alabama Overtime Pay Income Tax Exemption To End

It was a huge success. Too huge.

As the Alabama Legislature winds down its 2025 General Session, proposed legislation that would have extended the exemption from Alabama income tax for "overtime" pay has failed to pass and is now out of time. As a result, the exemption, which had an expiration date imposed in the original legislation, will expire on June 30, 2025.

Originally estimated to save Alabama employees working overtime about $40 million a year ended up costing the state education budget approximately $300 million over the first year.