Alabama ~ Sales and Use Tax: Computer Software Modified to a User’s Specific Needs Constituted Nontaxable Custom Software

The Alabama Tax Tribunal held that the taxpayers (a hospital and healthcare management company) were entitled to a refund of sales tax paid on the purchase of computer software because it constituted nontaxable custom computer software. The hospital contracted with the healthcare management company for the company to provide various computer software programs for use by the hospital. The hospital paid sales tax to the company on the software, which in turn remitted the tax to the Department of Revenue. The taxpayers subsequently filed a joint petition for a refund of the sales tax paid. The department denied the petition because “the software contained canned software that was customized and the nontaxable customized portion was not separated from the taxable canned portion on the invoice.” On appeal to the Tribunal, the taxpayers argued that the software was nontaxable custom software because it was modified for the exclusive use of the hospital. The Tribunal held that there was nothing in Alabama statutory or case law that supported the premise in the department’s regulation (810-6-3-.37) on computer software that canned software that was modified to the particular specifications of a purchaser constituted custom software only to the extent of the modifications. Relying on a previous Alabama Supreme Court decision, the Tribunal held that only unmodified computer software sold to nonexempt customers over the counter is subject to sales or use tax. Here, the department conceded that the software at issue had been modified to fit the specific needs of the hospital. Therefore, the software constituted nontaxable custom software.

Russell County Community Hospital & Medhost of Tennessee, Inc. v. Alabama Department of Revenue, Alabama Tax Tribunal, No. S. 15-1683, June 13, 2016, ¶201-872

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