Alabama's tax nexus rules determine when businesses must register for sales tax, income tax, and employment taxes in the state. Companies domiciled or incorporated in Alabama automatically have nexus and must register from formation, while out-of-state businesses trigger registration requirements by crossing specific thresholds.
Understanding these thresholds is crucial because crossing them creates immediate compliance obligations and potential penalties for non-registration. Alabama uses different triggers for different tax types: economic thresholds for sales tax, factor-presence tests for income tax, and employee-based triggers for payroll taxes. Each operates independently, so you could owe one type of tax without owing others.
Alabama adjusts income tax factor thresholds annually for inflation under Alabama law, and the Department of Revenue publishes updated amounts each year. The $250,000 sales tax threshold remains fixed but could change through future legislation.
Alabama establishes sales tax nexus through two primary methods: economic activity thresholds and physical presence triggers. Once either threshold is crossed, businesses must register and begin collecting Alabama sales tax immediately.
Alabama's economic nexus rule requires remote sellers with more than $250,000 in retail sales to Alabama customers during the prior calendar year to register and collect sales tax. This threshold includes both taxable and nontaxable retail sales but excludes wholesale transactions with valid resale certificates.
If you meet the Alabama economic nexus threshold, your obligation to collect Alabama sales tax begins on January 1 following the year your business exceeds the threshold. Alabama doesn't use transaction count requirements, so a single large contract can establish nexus just as easily as many small sales.
Individual sellers who make sales through a marketplace do not include their marketplace sales when calculating their own Alabama economic nexus threshold if the marketplace facilitator is already registered and collecting Alabama tax on those transactions.
Certain business activities create a physical nexus in Alabama, establishing immediate tax obligations regardless of sales volume:
Physical presence creates sales tax nexus instantly, making the $250,000 economic threshold irrelevant for businesses with any Alabama footprint.
Be sure to apply for Alabama sales tax registration at least 3 to 5 business days before you need to start collecting tax. Registration occurs through the My Alabama Taxes (MAT) portal, where businesses can choose between standard local rate collection or Alabama's Simplified Sellers Use Tax (SSUT) program with a flat 8% rate.
Alabama assigns filing frequency based on tax volume—typically monthly for larger sellers and quarterly for smaller ones. Returns and payments are generally due by the 20th of the month following the collection period.
Alabama Code § 40-18-31.2 creates the factor presence standard for business activity in the state to determine nexus for business income tax, business privilege tax and financial institution excise tax. This applies to C-corporations and LLCs electing corporate tax treatment.
For tax years beginning on or after January 1, 2025, corporations and LLCs electing corporate tax treatment have "substantial nexus" when they exceed any of these Alabama thresholds:
The 25% rule catches smaller businesses whose Alabama activity represents a significant portion of their total operations, even if dollar amounts fall below the absolute thresholds. The section stipulates that the threshold amounts may be adjusted periodically, consistent with the Consumer Price Index.
Federal law protects some businesses from Alabama income tax even if they exceed factor-presence thresholds. This protection applies only to soliciting orders for tangible personal property that are approved and shipped from outside Alabama. The protection disappears when employees provide services, handle inventory, or perform activities beyond pure sales solicitation.
Once factor-presence thresholds are exceeded, businesses must register through My Alabama Taxes and file Form 20C (Corporate Income Tax) and Business Privilege Tax returns annually. Estimated payments are due quarterly, with the annual return due by the 15th day of the fourth month after year-end.
Employment tax nexus in Alabama is straightforward: hiring any employee who performs work physically within the state creates immediate tax obligations, regardless of revenue or other activity levels.
Any employee working from an Alabama location—whether full-time staff, part-timers, seasonal workers, or remote hires—establishes employment tax nexus. Temporary assignments count as well; a sales representative spending time in Alabama can trigger withholding requirements for wages earned during that work period.
Employment nexus requires three separate registrations:
Alabama's tax rules capture modern business activities, including cloud software, digital products, and remote employees working from Alabama locations.
Digital products and SaaS subscriptions are treated as taxable personal property in Alabama. The $250,000 economic nexus threshold applies to all retail sales, including electronically delivered software and cloud-based services.
Remote employees working from Alabama addresses create both employment tax nexus (immediate) and potential income tax nexus if payroll exceeds $68,000 annually or represents 25% of total company payroll.
Marketplace facilitators collecting Alabama tax on your behalf exclude those sales from your personal $250,000 threshold calculation. However, affiliate marketing relationships or drop-shipping arrangements with Alabama-based partners can create physical presence nexus requiring immediate registration.
Reaching tax or employment nexus in Alabama may also result in the need for foreign registration with the Secretary of State. Although Alabama doesn't have specific secretary of state nexus thresholds, states are more likely to consider a company as "doing business" if it's already paying taxes there. Understanding tax nexus thresholds helps identify when Secretary of State registration may also become necessary.
Once any Alabama nexus threshold is crossed, immediate registration and ongoing compliance become mandatory, with penalties and interest accruing from the date nexus was established.
Alabama expects detailed documentation supporting nexus calculations. This includes:
Alabama imposes penalties for late registration and non-compliance. Interest accrues from the date tax was originally due, and the Department of Revenue can assess back taxes for periods when nexus existed but registration was missing.
The state offers voluntary disclosure programs that may limit lookback periods and reduce penalties for businesses proactively addressing past exposure before audit contact.
Discern provides comprehensive registered agent services and automated compliance tracking to ensure your Alabama obligations are met without administrative burden. Our platform monitors compliance requirements across all jurisdictions where you operate, handling foreign registrations and ongoing filing requirements through a single dashboard.
Ready to streamline your Alabama compliance requirements? Book a demo with Discern today.
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