Alabama Supreme Court Issues Landmark Ruling on the Taxation of Computer Software

SALT Alert: Alabama Edition

Client Alert

Author(s) ,

In a 5-3-1 decision, the Alabama Supreme Court ruled on Friday that the sale of computer software in Alabama is subject to sales or use tax, even if it’s customized in whole or in part for a particular user (see Ex parte Russell County Community Hospital, LLC, Ala. S. Ct., Case No. 1180204 (May 17, 2019)). This ruling was despite the long-standing Alabama Department of Revenue (ADOR) guideline providing that charges for “custom software programming” are not subject to Alabama sales/use tax. Former tax attorney Justice William B. Sellers, one of the major proponents of legislation that eventually established the independent Alabama Tax Tribunal, authored the majority opinion. 

The taxpayer, Russell County Community Hospital, paid sales tax to its software vendor/consulting firm, Medhost of Tennessee, Inc. (our firm’s client), of approximately $18,000 and later sought a refund arguing that the software in question qualified under the ADOR regulation cited above as “custom software.” Instead, the Court affirmed the lower court’s denial of the refund and then announced that “all software, including custom software created for a particular user, is ‘tangible personal property’” subject to sales and use tax in Alabama. Readers may recall when the Court ruled that canned software would be subject to sales/use tax, on a prospective basis, in Wal-Mart Stores Inc. v. City of Mobile in 1996.

The majority opinion reaffirmed, however, that certain related services wouldn’t be taxable if the vendor invoices them separately from the charge for the software. Four justices wrote in either concurring or dissenting opinions that they felt the Alabama Legislature was in a better position to dictate the parameters of the taxation of computer software, or at the very least, to address the issue of what Justice Greg Shaw termed potential “artful invoicing.”

The decision is expected to have broad implications; practitioners have already requested clarification from the ADOR that the new standard will be applied prospectively only. Indeed, the ADOR’s long-standing dichotomy between canned and customized software remains in its 20+ year old regulation. Thankfully, initial indications are that the state’s largest private auditing firm, which represents the majority of cities and counties in the state, will not apply the ruling retroactively.

If you have any questions regarding the ruling or potential implications, please contact the authors ( or ( or any other Alabama member of the firm’s SALT Practice Team.


Bradley Announces Addition of New Tax Partner

We welcome Davis Smith to our Montgomery and Birmingham offices, effective May 13. An NYU and University of Alabama School of Law grad with over 18 years of experience, Davis regularly counsels clients on federal, state and local tax and business strategies in a variety of industries, with a particular focus on regulated industries, including insurance companies and investment advisors, and the professional services industry. He has extensive experience advising clients on structuring their businesses through the use of pass-through entities. He can be reached at


Upcoming SALT Team Seminars and Speeches:

May 21, 2019 – State Taxation of Pass-Through Entities - Council On State Taxation (COST) Intermediate/Advanced Income Tax School – Dallas, Texas – Will Thistle

June 13, 2019 -- Recent SALT Developments, Both Nationally and in Alabama – Alabama Society of CPAs 100th Year Anniversary / Annual Meeting at Wynlakes Golf and Country Club, Montgomery, Alabama – Bruce Ely and Will Thistle

June 20, 2019 -- Recent Alabama SALT Developments and Prognostications for Next Session – 43rd Annual American Institute on Federal Taxation – Embassy Suites, Hoover, Alabama – Deputy Commissioners of Revenue Joe Garrett and Curtis Stewart, along with Bruce Ely

June 24, 2019 – State Taxation of Pass-Through Entities – Institute of Professionals in Taxation (IPT) Annual Meeting – San Antonio, Texas – Will Thistle

July 15, 2019 – Impact of the Tax Cuts and Jobs Act on the Southeastern States – Southeastern Association of Tax Administrators (SEATA) Annual Meeting – Orlando, Florida – Bruce Ely

June 28, 2019 – Indirect Tax Update – Focusing on Issues Vital to a Tax Department – TEI Region 8 Annual Conference, Hilton Head Island – Chris Grissom, Bradley; Scott Jackson, KPMG; Mary Alice Cashin, Duff &Phelps; with David Stevens, Cook Inlet Region, as the Moderator

August 6, 2019 – Southeastern Regional Tax Update – Council On State Taxation (COST)/Tax Leadership Roundtable, Encompass Health Headquarters, Birmingham, Alabama – Chris Grissom, Bruce Ely, Jimmy Long, Will Thistle