Alabama's Sales and Use Tax laws contain several provisions which give Alabama an advantage over other states.  The law provides for rate differentials, abatements , exemptions for specific items, and Enterprise Zone credits.  The sections of law cited below are found in the Code of Alabama 1975.

Sales & Use Tax Rate differentials

The state sales & use tax general rate in Alabama is 4.0%.

The state sales & use tax rate for manufacturing and farm machinery is 1.5%.

In addition to state taxes, most cities and counties also levy their own sales & use taxes, which provide similar rate differentials.
 

Sales & Use Tax Abatements

The Tax Incentive Reform Act of 1992 (Chapter 9B, Title 40) allows qualifying industries to receive abatements of state and non-educational county and city construction-related sales and use taxes.
 

Sales & Use Tax Exemptions

Film Productions.  Alabama law (Sections 40-23-4(46), 40-23-62(35), and 40-26-1(b)(iii)) allows exemptions from sales tax, use tax, and lodgings tax for film projects approved by the Alabama Film Office.  For more information and to apply, contact the Alabama Film Office (1-800-633-5898) for Form FCTE.  Also, see ADOR regulations 810-6-3-.48.05 for sales and use taxes and 810-6-3-.37.02 for lodgings tax.

Pollution Control Equipment.  Equipment or materials purchased primarily for the control, reduction, or elimination of air or water pollution are exempt from sales and use tax under Alabama law (Sections 40-23-4(a)(16) and 40-23-62-(18)).

Raw Materials.  Tangible personal property used by manufacturers or compounders as an ingredient or component part of their manufacturing or compounded product are specifically exempt from sales and use tax under Alabama law (Sections 40-23-1(a)(9)b and 40-23-60(4)b).

Utility Gross Receipts Tax Exclusion. Alabama law (Sections 40-21-83 and 40-21-103) allows exclusions from the utility gross receipts tax and the utility service use tax if electricity or natural gas is used in an electrolytic or electro-thermal manufacturing or compounding process.

 

All real and personal property in Alabama is subject to property tax unless specifically exempted by law. The Alabama Constitution of 1901 and Alabama law contain various property tax provisions that may be considered as industrial incentives.

Assessed Value fixed by Alabama Constitution

Amendment 373 of the Constitution provides that business property will be assessed at 20% of its fair market value. That is, for property with a fair market value of $1,000,000, the assessed value would be $200,000 ($1,000,000 * 20%).  The combined state and local millage rate would then be applied to the assessed value.
 

Low Millage Rates

Section 214 of the Constitution limits the state millage rate on both real and personal property to 6.5 mills (3 mills for education, 1 mill for relief, and 2.5 mills for general uses). This rate is equivalent to a tax of $6.50 for every $1000 of assessed value.

However, both cities and counties may levy millage rates in addition to the state's 6.5 mills. These local rates vary, but the average rate for any one locality is 43 mills, including the state's 6.5 mills. For business property with a fair market value of $1,000,000 the average property tax would be only $8,600 ($1,000,000 * 20% * .043).
 

Tax Abatements

The Tax Incentive Reform Act of 1992 (TIRA) allows qualified industries to receive abatements of non-educational property taxes for new businesses locating to Alabama, and for expansions of existing facilities in Alabama.  TIRA is in law at Chapter 9B, Title 40, Code of Alabama 1975. 

Pollution Control Equipment Exemption

All equipment, facilities, or materials constructed or acquired primarily for the control, reduction, or elimination of air or water pollution are statutorily exempt from property taxation. The pollution control exemption is provided in Section 40-9-1(20), Code of Alabama 1975.

Raw Materials, Finished Goods, and Inventory Exemptions

All raw materials, finished goods, and stocks of goods, wares, and merchandise held for resale are statutorily exempt from property taxes.  The raw materials exemption is provided in Section 40-9-1(13), Code of Alabama 1975. The finished goods exemption is provided in Section 40-1(14), Code of Alabama 1975. The inventory exemption is provided in Section 40-9-1(23), Code of Alabama 1975, and in Amendment 373 to the Alabama Constitution of 1901.

Corporations and other business entities pay Alabama income tax based on the net taxable income derived from business conducted within the state.  The amount of net income apportioned to Alabama is determined by applying an equally weighted three-factor formula of property, payroll, and sales to total net income.  Alabama law offers several income tax incentives for new or expanding businesses in Alabama.

 

Constitutional Income Tax Limits and Federal Income Tax Deductions

There are constitutional restrictions in the Alabama Constitution of 1901 that add to the stability of Alabama's business income tax environment:

• Amendment 25 limits the individual rate of income taxation to no more than 5%.

• Amendment 225 allows the individual taxpayer to deduct federal income tax paid from his individual gross income.

• Amendment 662 limits the corporate rate of income taxation to no more than 6.5%.

 

• Amendment 662 allows the corporate taxpayer to deduct , from its gross apportioned and allocated Alabama income, the full apportioned Alabama amount of federal income taxes paid.

Income Tax Capital Credit

• If a business entity invests in a qualifying project that meets certain requirements and is approved by the Alabama Department of Revenue, the company may receive an annual credit against its income tax liability generated from the qualifying project.


 

• The capital credit is equivalent to 5% of the capital costs of the qualifying project, and can be utilized for a period of 20 years beginning during the year the project is placed in service.


 

• The credit is available to all types of business entities, including: S corporations, C corporations, limited liability companies (LLCs), partnerships, trust, and sole proprietorships.

• The capital credit is available under Sections 40-18-190 through 40-18-203, Code of Alabama 1975.
   

Net Operating Loss Carryforward

Corporate income tax law provides for a 15 year carryforward of net operating losses. In computing net income, a corporation is allowed a deduction for the sum of the net operating losses which are carried forward. Each net operating loss may be carried forward and deducted only during the 15 consecutive year period immediately following the year in which it arose. See Section 40-18-35.1, Code of Alabama 1975.

Income Tax Pollution Control Equipment Deduction

Alabama provides for a deduction for pollution control equipment, as defined by, and in conformity with, federal income tax law and regulations.
 

Income Tax Enterprise Zone Credit

The corporate income tax enterprise zone credit is offered to help encourage economic growth to areas in Alabama that are considered economically depressed.  To qualify for this credit, a business must meet detailed requirements concerning site location and employee qualifications.  The enterprise zone credit is available under the Alabama Enterprise Zone Act, Sections 41-23-20 through 41-23-32, Code of Alabama 1975.

For information please contact:
Alabama Department of Economic and Community Affairs
Enterprise Zone Coordinator
401 Adams Avenue
P.O. Box 5690
Montgomery, AL 36103-5690
334-242-5438
 

Income Tax Education Credit

An employer could qualify to receive an income tax credit of 20 percent of the actual cost of an employer sponsored educational program that enhances basic skills of employees up to and including the twelfth grade functional level.  This concept would include programs which teach English as a second language.  This credit is available under Sections 40-18-135 through 40-18-139, Code of Alabama 1975.

For more information on program criteria, please contact:
Alabama Department of Education,
Adult and Community Education Program
Gordon Persons Building, Room 5343
50 North Ripley Street
Montgomery, AL 36130
800-392-8086 or 334-242-8181