Alabama sales and use tax compliance

Find out interesting insights with Shaun Walker, SOC Compliance Manager , Norfolk Southern

Moderated by Sherry, Financial Technology Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Sherry: Hello, and welcome to all our viewers on CFO Insights. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have Shaun Walker here with me, who is a seasoned internal audit leader with a wealth of experience in driving risk management, compliance, and governance initiatives across diverse industries. Thank you so much for joining us today, Shaun. Today we’ll be talking about a very niche topic, which is Alabama sales and use tax compliance. To get us started, Shaun, could you just provide us with an overview of Alabama State sales and use tax rates? And how do these rates differ across goods and services?

Shaun Walker: Sure. So I’ll say that the general rate is 4% for most goods, like clothing, electronics, and general merchandise. Certain rules have differences for specific industries. For example, automotive vehicles are locked in at a 2% rate. Farm machinery and manufacturing equipment are at a 1.5% rate, and grocery items are reduced to a 3% rate versus 4%.

Sherry: To dive deeper into the topic, could you also discuss some of the jurisdictions in Alabama with notably high or low tax rates? And how does this affect businesses?

Shaun Walker: Different local jurisdictions set different sales tax rates. For example, Arab, Alabama, has one of the highest tax rates at 12.5%, whereas East Florence, Alabama, has a relatively low tax rate of about 5.5%. For businesses, this variation means applying the correct rate depending on the sale location. If we don’t, it can lead to noncompliance.

Sherry: And how often do Alabama’s sales and use tax rates change? And how do businesses keep up with these updates?

Shaun Walker: The rates can change several times a year, particularly at the local level. For example, in February 2024, Clay County increased its rate from 6% to 10%. Statewide changes, such as the recent reduction in groceries, also occur but less frequently. The way that businesses keep up is by relying on third-party tax compliance solutions or government resources. Updating systems to reflect new rates requires constant vigilance, which can be challenging for small and mid-sized businesses without any type of automated solution.

Sherry: What are some of the primary resources available to businesses to stay informed about sales and use tax changes in Alabama?

Shaun Walker: There are three main resources. First is the Alabama Department of Revenue—that’s the primary source. Then there are sales tax rate lookup tools provided by Avalara, which help businesses quickly access rates based on addresses. Third, there are websites like salestaxhandbook.com that provide a detailed breakdown and change alerts.

Sherry: What challenges do companies face when managing compliance with Alabama’s sales and use tax rules? Could you share some examples?

Shaun Walker: A few challenges stand out. One would be the complexity of tax rates—variations in rates based on locality can be confusing, especially for businesses selling across multiple jurisdictions. The frequency of rate changes makes it difficult to stay up to date because they can change multiple times per year. Determining taxability is another challenge. Not all items or services are taxed, so companies need to correctly categorize products. A common issue is misclassifying professional services, which are generally exempt.

Sherry: How can artificial intelligence help businesses manage sales and use tax compliance more efficiently?

Shaun Walker: One way is by automating tax rate updates. AI-driven systems can automatically update tax rates across jurisdictions, ensuring real-time compliance. AI can also analyze transactions to determine taxability, helping reduce errors in tax applications. Lastly, continuous monitoring of legislative changes and automatic adjustments to tax settings can be facilitated through AI.

Sherry: Additionally, how can AI support companies during audits for sales and use tax compliance?

Shaun Walker: There are two main ways. First is document retrieval. AI systems can quickly retrieve invoices, tax records, and supporting documentation, saving time and reducing stress. The second is error detection. AI can review historical transactions to identify discrepancies, such as applying an incorrect tax rate.

Sherry: What do you see as the future role of AI in handling Alabama sales and use tax compliance?

Shaun Walker: AI’s role will expand from compliance management to strategic planning. AI can forecast the impact of tax rate changes on company revenue by analyzing historical data and identifying sales trends in high-tax areas. It can also enhance reporting by providing real-time compliance dashboards, giving finance teams immediate insights into tax liabilities. Lastly, AI can send proactive compliance alerts, notifying companies of pending legislative changes and their potential impact on tax compliance.

Sherry: Thank you so much, Shaun, for sharing your insights on the topic. Your expertise provides valuable guidance for organizations aiming to optimize their financial operations.

Shaun Walker: Absolutely. Thanks for having me.