Alabama Supreme Court holds that all software, canned and custom, is tangible personal property subject to sales tax

In a landmark sales tax case in Alabama, the Alabama Supreme Court (the Court), in a 5-3-1 decision, found that all software, whether canned (i.e., prewritten software) or custom, is tangible personal property subject to sales tax. See Ex parte Russell County Community Hospital, LLC, Ala. S. Ct., Case No. 1180204 (May 17, 2019).

In Russell County Community Hospital, the taxpayer sought a refund for sales tax paid on the purchase of software it determined to be custom software pursuant to Ala. Admin. Code, Reg. 810-6-1-.37. After the Alabama Department of Revenue (ADOR) denied the taxpayer’s refund request, the taxpayer appealed to the Alabama Tax Tribunal which reversed the ADOR’s denial of the refund request. The ADOR won its appeal in the Russell County Circuit Court and subsequently saw the Russell County Circuit Court decision affirmed by the Alabama Court of Civil Appeals. The Court granted certiorari to the taxpayer’s appeal.

Despite the parties agreeing that custom software was not subject to tax in Alabama1, and thus arguing whether the software at issue constituted custom software, the Court found that “there is no distinction between canned or custom software” and further declared that “[a]ll software is tangible personal property and thus subject to sales tax.” The Court’s decision in Russell County Community Hospital is in direct contrast to the longstanding position of the ADOR and now gives the ADOR the ability to impose sales tax on custom software programmed specifically for a taxpayer.

Also, the Court’s majority opinion reaffirmed that charges for separately stated related services would not be subject to tax. Specifically, such related services will maintain their character as a nontaxable service, not tainted by the taxability of the software, so long as they are separately stated from the taxable charges on the invoice.


At the moment, it is not known whether the decision will be applied retroactively; however, requests have been made for clarification on this matter from the ADOR. Indications are that this decision will not be applied retroactively given the ADOR’s 22-year position on treating customized software as a nontaxable service.

Alabama taxpayers should review their software purchases to understand the impact of the change in law. Specifically, taxpayers should evaluate Alabama software purchases to identify any potential additional sales tax liability (i.e., software purchases sourced to Alabama where sales tax has not been charged). Further, taxpayers should make certain that nontaxable services are separately stated on the invoice to avoid overpaying sales tax on such nontaxable transactions. In addition, taxpayers may also review whether any portion of the purchase price of software purchased outside of Alabama should be sourced to the state as this is an area often reviewed under audit.

Lastly, it is worth noting that it is not anticipated that this decision will affect the ADOR’s long-standing position that software as a service (SaaS) is a nontaxable service, provided that the purchaser does not download or possess any software code. However, the ADOR’s position with respect to SaaS, and software in general, should be monitored closely.


  1. In 1997, the ADOR enacted Ala. Admin. Code, Reg. 810-6-1-.37, clarifying its position that canned computer software is tangible personal property regardless of the method of delivery, subject to the Alabama’s sales tax, while expressly stating that “custom software programming is not subject to tax regardless of the method of transfer to the customer.”


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