Alabama Legislature Rejects (Yet Another) Attempted Digital Tax Expansion

Last month, a much-anticipated bill drafted by the Alabama Department of Revenue (Department) was introduced in the Alabama Senate that would have expanded the definition of tangible personal property to include “digital goods.”  See Senate Bill 242 (introduced February 16, 2016).  Fortunately, the Senate Finance and Taxation Education Committee (Committee) rejected the bill on March 9, 2016, after hearing testimony from Assistant Department Counsel Christy Edwards and extensively questioning her on the bill’s content and motives.  Notably, the Department continues to take aggressive positions in an effort to tax digital goods and services, without the requisite statutory or legislative approval to back it up.


On February 28 2015, the Department proposed an amendment to Regulation 810-6-5-.09, which would have amended the rental tax on tangible personal property to include “digital transmissions” (broadly defined to include digital content such as streamed audio and video).  After significant opposition from industry representatives, the Joint Legislative Council (composed of leadership from both chambers) wrote a letter to Commissioner Julie Magee in April 2015 requesting that the proposed regulation be withdrawn.  It cited to the fact that the proposal was overly expansive and would in effect be the imposition of a new tax, a determination that rests with the legislature.  See our prior coverage here.  With hesitation and only after continued pushback from the Legislative Council, the Department withdrew the rental tax regulation amendment on July 7, 2015.

In response to the rejection of the proposed regulation, the Department went through its historic revenue rulings and revoked a number of technology rulings in January 2016, noting they will continue attempting to apply the rental tax to streaming services.  Commissioner Magee cited the revocations as a mere “clarification” that did not change the law.  In her comments to the revocations, Commissioner Magee noted that all taxpayers will be collecting and remitting tax in the future “[e]ither legislatively through a digital goods bill or through audits and assessments.”

Senate Bill 242

The digital goods bill arrived just a few weeks later, sponsored by Senator Trip Pittman.  As introduced, the bill would define “tangible personal property” to include “digital goods.”  For these purposes, digital goods include “[s]ounds, images, data, facts, or information, or any combination thereof, transferred electronically, including, but not limited to, specified digital products and any other service transferred electronically that uses one or more software applications.”  As is readily apparent, this language is extremely broad and arguably includes every service delivered over the internet.  The definition also raised concerns because it borrows from Streamlined language (“transferred electronically”; “specified digital products”), but Alabama is not a Streamlined state and does not define those terms elsewhere in the legislation or Code.  As drafted, the bill would have become effective immediately upon passage.

After cancelling a scheduled Committee hearing earlier this month, citing the need for revisions, the sponsor and Department entered the March 9 public hearing with a substitute bill.  Instead of defining “digital goods” as tangible personal property, the substitute provided that the “digital equivalent of tangible personal property” is now also tangible personal property.

Christy Edwards testified at the hearing in favor of the bill.  Consistent with the Department’s position over the past year, she consistently framed the bill as a “clarification” of existing law.  Several senators questioned this notion, noting that there would be no need for legislation if digital goods and equivalents are already taxed to the extent suggested in the bill.  Many senators also pushed back on the lack of clarity in the bill, asking Ms. Edwards to explain with specificity what is taxable and not taxable based on the bill’s language—which she largely could not do aside from a continued reference to digital photographs.  In apparent frustration, one senator specifically requested a chart from the Department listing goods and services that would be taxable (or not) based on this bill to provide to her constituents.

Committee discussion of the bill concluded with a vote on a motion by the sponsor to favorably recommend SB 242 to the Senate as a whole.  The Committee emphatically rejected the motion by a two-thirds majority, refusing to advance the bill 8-4.

Companion Exemption Bills

After Senate Bill 242 was introduced, companion exemption bills were introduced in both chambers of the Alabama Legislature that would specifically exempt “products transferred electronically acquired with less than the right of permanent use granted by the seller or use which is conditioned upon continued payment from the purchaser” from the sales, use and rental taxes.  See House Bill 349 and Senate Bill 345.  This exemption language captures streaming audio, video and games (and any other subscription-based digital good or service to which perpetual use rights are not acquired by the purchaser).  While these bills would undercut the efforts of the Department to expand the current statutory imposition to these items, their outlook is unclear.  On March 16, 2016, the House bill was passed out of committee and is now being considered by the House as a whole.  Last Friday, the exemption bill was endorsed by the Business Council of Alabama after hearing from a number of business groups concerned with the recent efforts of the Department.  The exemption legislation is one to closely monitor in the coming weeks.

McDermott Will & Emery

Eric D. Carstens
Eric D. Carstens focuses his practice on state and local tax matters, assisting clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. Eric engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm's taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property. Read Eric D. Carstens' full bio.

Stephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen Kranz's full bio.




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