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State Tax Primer from A to W: Alabama

October 23, 2008 · 19 comments

Welcome to my series on state taxes! For information about what I’m trying to do, read my introductory bit. And now, without further ado, let’s get started! First up, Alabama!

ALABAMA

Population: 4,627,851 (23rd)

Capital: Montgomery

Largest City: Birmingham

Gross Domestic Product: $160 billion

GDP per capita: $29,697 (44th)

2004 election winner: George W. Bush

web site: http://www.alabama.gov/

Income Tax

Alabama does have an income tax. Individuals who are domiciled in or residents of Alabama are subject to tax on their entire income whether or not earned in Alabama. And, if a citizen of a foreign country comes to Alabama to work, no matter how long that citizen “stays, buys a home, secures an Alabama driver’s license, does not intend to apply for U.S. Citizenship, and intends to ultimately return to the country of origin”, domicile is in Alabama.

If you do earn income in multiple states and are required to file in other states, you will prorate your federal tax deduction on your Alabama return. Of course, if you include income from other states in your Alabama tax return, you can claim a credit for taxes paid to those states.

Alabama taxes both earned and unearned income with a number of exemptions and exclusions. Exemptions include: payments for Social Security, military, civil service, state/local government and qualified private pensions. Additionally, out-of-state government pensions are tax-exempt if they are defined benefit plans. Also excluded from income (by way of a few examples): unemployment compensation, welfare benefits, child support, workers compensation, gifts, life insurance death benefits, Alabama 529 plans and foreign missionary compensation after the first two years (!).

Standard deductions and personal exemptions vary by income and filing status. Similarly, state income tax rates vary depending on filing status and income. The top tax rate for those with taxable income of $100,000 or more is 5%. The lowest tax rate is 2%.

Alabama does participate in the Set Off program. An Alabama state tax refund will be taken to satisfy any outstanding liabilities owed to the State of Alabama or to the Internal Revenue Service; a federal refund will be taken for same.

Sales Tax.

Alabama has an aggressive, tiered sales tax structure, depending on what you’re buying. The rates are:

1.5% of the net difference paid for farm machinery; this rate also applies to the gross receipts from sales of machines, parts, and attachments for machines used in manufacturing, processing, compounding, mining, and quarrying tangible personal property.

2% of the net difference paid for new and used automotive vehicles, truck trailers, semi-trailers, and manufactured homes.

3% of the retail sales price of food for human consumption sold through coin-operated vending machines.

4% of the gross proceeds of sales of all tangible personal property, other than that listed previously and specifically exempted by law, and the gross receipts from places of entertainment or amusements.

Alabama holds the distinction of being one of only a handful of states that still imposes a sales tax on food and over the counter medicine. Prescription medicines are exempt.

Alabama does have a sales tax holiday. The sales tax holiday begins at 12:01 a.m. on the first Friday in August and ends at twelve midnight the following Sunday. Counties and municipalities may opt out by notifying the Department of Revenue.

Rental Tax.

Alabama also charges a rental tax for leasing or renting tangible personal property. The tax is imposed on the gross paid at the following rates:

1.5% for automotive vehicles (yes, I do find it curious that this is not the same as sales tax for the purchase of a vehicle since the sales tax rates are otherwise comparable)

2.0% for Linens/Garments

4.0% for Other items subject to “true leases”

“Conditional sales leases” (basically, lease to purchase arrangements) are not subject to the rental tax, rather they are subject to sales tax.

Tobacco Tax

Alabama’s tax rate on cigarettes is 21.25 mills for each cigarette. This converts to $0.02125 for one stick or $0.425 for a package of twenty cigarettes, ranking them 40th in the country. The rates on other tobacco products like snuff, smoking tobacco, chewing tobacco, and cigars vary based on weight and retail selling price of the products.

Gas Tax

The gas tax rate in Alabama is $.16 per gallon (in the lower 20% of the country).

Property Taxes

The state property tax is 6.5 mills (.0065) for real and personal property. Local tax rates vary.

“Real property” is defined as “land and all things attached to it” with the exception of home appliances, furniture and personal items like jewelry. “Personal property” refers to all property other than real property and includes cars, motorcycles and RVs. Assessments for purposes of calculating the tax are based on usage.

Inheritance and Estate Tax

Alabama does not impose an inheritance tax. Their estate tax, like many state estate taxes, is linked to the federal estate tax. With the changes in the federal system, Alabama ceased to collect estate taxes for estates after 12/31/04.

Overall Tax Burden

The overall tax burden in Alabama, taking into account taxes paid by individuals, results in a ranking as 38th most-tax burdened state in the country, according to Tax Foundation.

taxgirl says

I’ll admit it, I have a soft spot for Alabama. It’s beautiful, though awfully darn hot.

But I’m not crazy about their tax system.

For one, the tiered systems are a bit much. It seems like every other tax is tiered: income, sales, rental, etc. I’m not a fan of a flat tax rate for every instance but I think that complicating taxes leads to lower compliance. The different levels – and different assessment ratios for property taxes based on usage – feel more convoluted than need be.

And yes, Alabama has low taxes compared to other states. And low taxes are arguably a good thing. However, state taxes generally fund state government – that means social programs, education, infrastructure and more. And while it is not always true that low taxes corresponds to low benefits to taxpayers, statistically that appears to be true in Alabama. More than 15% of the state lives in poverty, according to the US Census, among the highest rates in the country; it seems odd, then, to have such a regressive sales tax. The state has one of the highest child mortality rates in the country (8th) and one of the lowest populations of high school graduates (47th). There are clearly some improvements to be made.

Am I saying that the solution is to simply raise taxes? Of course not. I realize that it may be difficult for a state to raise revenue when 15% of the population lives in poverty – ironically, though, the state’s unemployment rate is among the lowest in the country, even in today’s economy. But I am skeptical of a tax structure that is regressive when it comes to sales tax yet progressive when it comes to income tax – all the while plugging in additional exemptions and creating complicated tiers of taxation.

It presents interesting questions: would repealing the sales tax on food, while reducing revenue, increase take home pay and possibly boost the standard of living. That’s a tax cut, not an increase. Would widening the tax brackets for purposes of income tax result in more revenue without actually raising tax rates? Would it be better to impose one rate for all taxpayers (something that many states do) or would a tax increase for the lower and middle brackets further hurt the economy?

Hopefully, as we go along in the series, we’ll see where other states land in terms of tax revenue versus standards of living and whether it makes a difference. The goal is not to be judgmental but to maybe make some sense of tax policy. I’d love your thoughts on this!

Thanks to Kelly Phillips for her input regarding Alabama’s income tax. No, that’s not me being crazy. I’m talking about the other Kelly Phillips – who is also a tax geek. Thanks, Kelly!

(Note: tax rates were current as of 10-20-2008 and were taken from the AL Department of Revenue web site)

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{ 17 comments… read them below or add one }

1 Vinny October 23, 2008 at 12:28 pm

FYI, the capital of Alabama is Montgomery (the other “M” city), although I find Mobile to be much nicer – like New Orleans without all the crazy crime.

2 Kelly October 23, 2008 at 12:35 pm

Oh gosh, thanks so much for pointing that out! See, THAT’S the kind of stuff that happens when you’re pounding your head against a wall because your blog won’t load (I apparently killed many, many brain cells).

I’ve since corrected my error.

And kudos to you! Out of thousands of viewers so far today, you are the only person to note the error (and say so)… Well done!

3 Mrs. CPA October 23, 2008 at 12:47 pm

I’m happy to help! Excellent article, I’m looking forward to the series.

4 Chris Stout October 25, 2008 at 12:56 am

Kelly, I enjoy your blog very much and only on several occasions have I posted any comments. Usually (surprise!) it concerns sales and use tax.

One item that you did not cover was that Alabama cities and counties have the authority to levy sales tax in the same manner as the state, which increases the tax burden more than the 4% you allude to in the article. In some areas, the sales tax rate is bordering on 10%!

In addition, the administration burden of collecting and remitting sales tax for business can be astounding. Each city and county can elect to either collect the tax themselves, have the state do it, or contract it out to one of three private collection firms. Any business with a substantial presence in cities and counties in Alabama could file dozens of returns a month! Not only does a business have to keep up with the current rates for the various tiers, but they also have to keep up with who they should be remitting the taxes collected.

Reforming the sales tax code in Alabama is a tall order. Why would a city or county give up that revenue when sometimes they make more than the state?

I’m looking forward to series, too!

5 Anthony Mitchell February 13, 2009 at 8:51 am

Can the state of Alabama keep my federal return if I owe the state?

6 Kelly February 17, 2009 at 3:24 pm

You mean your refund? Yes.

7 walter willenberg March 2, 2009 at 1:44 pm

I checked on my alabama state tax refund and it says I will get it in due time and not to bother asking them about it for 12 weeks. Whats up with this? Are they holding everyones refunds?

8 Melanie April 25, 2009 at 12:30 am

Can I change my Alabama state income tax from direct deposit to check by mail? I filed around the first of April, and the “where’s my refund” keeps stating that they are sending checks as money in available in the Education Fund… like we need money coming out of the edu fund, but thats beside the point!! Do you know if I can change it to have the check mailed?
Thanks,
Mel

9 Kelly April 25, 2009 at 6:47 am

If you’ve already filed, I’m willing to bet the answer is no – for most returns, including federal, once you’ve made the decision to get a check, you’re stuck with it. Sorry!

10 Chris May 30, 2009 at 10:28 am

Hi! I am wondering about the AL state refunds. The AL website keeps saying my return has been approved, but no further info on when it will be deposited. What’s going on? I filed my taxes and did what I was supposed to do, why can’t the state?! Can they be penalized and pay ME interest on the money owed to me? I would have to pay them interest if I were late paying them!! Thanks for you help.

11 Trey July 10, 2009 at 4:25 pm

Alabama has a 90-day window to issue a refund free of interest. The clock starts the later of the due date of the return and the filing date of the return. Due to the economy, collections have lagged. If you check with the Alabama Department of Revenue, you will likely find that your refund has been processed (i.e. approved) but not released for payment. And the revenue agent is likely as in the dark as you as to when your refund might be mailed (or deposited). The good news (I guess) is that if you filed your return on time, interest begins to accrue on your balance July 16.

12 Trey July 10, 2009 at 4:31 pm

By the way, I echo what Chris said, county and local sales tax pushes the total sales tax burden to around 10% across the state. Arab, Alabama has had the distinction for several years of having the highest combined sales tax in the country, 12% (4% state, 4% county, 4% local). We are paying the price in a down economy of an overreliance on sales tax.

13 Kristina August 7, 2009 at 12:22 am

Hello! This is my first time reading the blog and I find it to be very informative, thanks. I have a question regarding owing the state money. If you have filled an extension, where might you find the info on how much money you owe the state because of interest and how can you find out what date you have until to pay it? Is there an option of a later extension? Thank you for your reply…

14 Connie November 11, 2009 at 5:57 am

The question I have is, when buying a pack of cigarettes how many taxes stamps are on the bottom. And are they included in the sale of the pack or are they charged after you pay the regular price. The reason I ask, is that some stores I have noticed only has 1 tax stamp on bottom (state). Then you go some other store and there’s 2 stamps (city) and (state). But the prices change day to day.

15 kevin May 11, 2010 at 4:16 pm

i live in fl but get work from al. i drive truck and go to ms or fl evryday. but pick up truck in al i do not work in al but they take al taxes out of check which comes from fl do i have to pay al taxes even if i live in fl and do not hit a time clock in al

16 Marilyn Smith April 29, 2012 at 8:29 pm

Can you claim the tax you paid on food when filing taxes in Alabama?

17 Laura June 14, 2013 at 10:48 am

We are getting ready to rent mailboxes within our organization only…do we have to pay AL state tax on the rental? In Ohio, that is not the case for storage of mail…just wondering. The tax person in our office says yes, but I’m new to the state and have done this in 2 other states where it was a resounding no to that question…our org is a non-profit org, too.

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