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“Digital Transmissions” Subject to Alabama Rental Tax! (Update)

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Note: There has been an update to the post (below) regarding the amendment to Regulation 810-6-5 to expand the tax base of the Alabama rental tax to a wide variety of digital products. The Alabama Department of Revenue reconsidered its proposed regulation and withdrew from further consideration. Pressure came from both the business and legislative communities as they argued that this type of expansion should come through the legislature and not be done via administrative means. As more states continue to evaluate creative ways to tax SaaS and digital transmissions, this issue may resurface in Alabama in the near future.

The Alabama Department of Revenue is amending Rule 810-6-5-.09 (Leasing and Rental of Tangible Personal Property) to clarify that “digital transmission” are subject to the Alabama rental tax. This announcement comes on the heels of the recent City of Chicago Announcement that it will begin taxing “on demand” streaming and various remote software access licensing agreements beginning September 1. The City of Chicago imposes a rental tax and an amusement tax which the City intends to enforce against providers of these digital services.

For Alabama tax purposes, the rule specifies that digital transmissions include “on demand” movies, television programs, streaming video, streaming audio, and other programs that are made available to customers regardless of the method of transmission. These items are now considered to be “tangible personal property” because they are perceptible to the senses.

The Alabama rental tax is based on the gross receipts derived from charged which are used in Alabama. For digital transmission, the service is used in Alabama if the customers delivery address is Alabama. The state rental tax is 4% but most local governments also have a rental tax rate that would apply.

This amendment to the rental rule seems to follow on a growing tax theme that images and sounds constitute tangible personal property because they are perceptible to the senses. This has been used in Arizona to support the imposition of their transaction privilege tax on SaaS and other digital transmissions and is being used by the City of Chicago to impose tax on digital streaming and various forms of remote access software. The state of Texas recently used this rationale in one of its rulings to support a conclusion that a non-resident taxpayer had nexus in the state because its electronic images were perceptible to users in Texas.

With one small adjustment to the definition of “digital transmission” the state of Alabama could be next state to begin taxing SaaS and other forms of cloud computing without any specific legislative authority. As state continue to be challenged for revenue, I suspect that many state revenue officials are carefully watching these jurisdictions to see what success they are having at taxing these digital transmissions as rental or lease transactions.

Ned Lenhart, CPA is the founder and President of Interstate Tax Strategies, P.C. (“ITS”). Ned has over 28 years of varied state tax consulting experience including roles as the Director of Compliance for the Missouri Department of Revenue, SALT Manager for Arthur Andersen in Kansas City, and Director with Deloitte in their Atlanta office from 1994 to 2003. He started ITS in 2003 to assist local and national companies by helping them develop proactive strategies to managing their multi-state sales tax obligations.

Comments or questions related to a post, may be submitted using the “Comment” feature below. Alternately, Consultation Requests may be submitted directly to Ned by using the orange "Request a Consultation" link on his Firm Profile page.

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