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Guidelines for Automobile Dealers
Sales Tax
The state sales tax on automotive vehicles is 2 percent of the gross proceeds of the sale. In
addition to light duty vehicles, an automotive vehicle also includes a truck, truck trailer, or
house trailer; motorcycle; certain boats; and other items (§ 40-23-2(4), Code of Alab. 1975).
The same rules apply regardless of whether the vehicle is new or used.
When a used automotive vehicle is taken in trade as a credit or partial payment on the sale of
a new or used automotive vehicle, the sales tax is levied on the net difference. Other items
exchanged for full or partial payment are to be included in the measure of the tax.
(Administrative Rule 810-6-1-.22). When a trade-in vehicle is resold, it is subject to sales tax
(Administrative Rule 810-6-2-104.02). Trade-in provisions do not apply when a rental or
leased vehicle is exchanged for a new or used vehicle. If a trade-in exceeds the selling price
of the vehicle being purchased, the dealer cannot add the amount of the trade-in allowance
to its sales tax return as a deduction (Administrative Rule 810-6-1-.22). If a dealer allows a
trade in on a wholesale, exempt, or out-of-state sale, the amount cannot be deducted on the
sales tax return.
When a certain type of automotive vehicle is removed from the state within 72 hours or
delivered out of state, special rules apply as outlined later in this guide.
Other items sold at a dealership such as parts and accessories are generally taxed at the full
state rate of 4 percent. Exemptions will be outlined later in this guide.
General Sales Tax Collection Issues
Sales tax must be added to the purchase price and collected from the retail customer. It is
illegal to refund or offer to refund, or absorb or advertise to absorb all or any part of the
amount of tax collected (§ 40-23-26(b), Code of Ala. 1975, and Administrative Rule 810-6-4-
.20). For purposes of the sales tax law, a retailer may advertise the sale of tangible personal
property by (i) stating the sales price alone without reference to the tax, (ii) stating separately
the sales price and the amount of tax to be collected thereon, or (iii) stating the sales price
“plus tax” or “exclusive of tax”. Retailers must maintain records that separately state the
amount of state, county, and city tax collected and furnish that information to the customer
upon request (§ 40-23-104(b), Code of Ala. 1975, and Administrative Rule 810-5-1-.246).
Most cities and counties also levy sales, use, and lease/rental taxes patterned after state law.
Some are collected by the Alabama Department of Revenue (ALDOR), while other localities
collect the taxes themselves or hire third-party firms to administer their taxes. Dealers must
collect the city and county taxes where the dealership is located. Be sure to check with the
city and county where your dealership is located to determine their filing requirements.
Reciprocity for City and County Taxes (Administrative Rule 810-6-5-.04.01): Only one city and/or
county sales, use, or rental/leasing tax may be collected irrespective of rate. For example, a
Montgomery resident who purchases a vehicle in Prattville and pays the City of Prattville and Autauga
County sales or use taxes cannot be charged the City of Montgomery or Montgomery County sales or
use tax when the vehicle is registered in Montgomery County.
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Tax-Exempt Sales: Charitable and nonprofit organizations or institutions have no special
exemption from sales or use taxes. However, certain entities may purchase items tax exempt.
All entities are required to annually obtain a certificate of exemption from ALDOR to make tax
exempt purchases. Exemption numbers and sales tax account numbers may be verified using
the state’s My Alabama Taxes website at www.myalabamataxes.alabama.gov. To verify a
sales tax account number, the dealer must log in to their My Alabama Taxes account.
However, exemption numbers may be verified without entering the login information.
Sales Tax Filing: To file sales taxes, visit www.myalabamataxes.alabama.gov.
Automobile Dealer Sales Transactions
Rebates: Manufacturers’ rebates of any type are taxable when applied to the purchase price
of an automotive vehicle. A rebate assigned to a customer is taxable when used as a down
payment on a vehicle. If the customer accepts the rebate in cash and does not apply it to the
purchase of a vehicle, it is not subject to sales tax. A dealer rebate is treated the same.
Example:
$50,000 Vehicle selling price
$500 Dealer fee
$50,500 Total
($5,000) Manufacturer’s rebate assigned to customer
$45,500 Cost to customer (taxable amount would be $50,500)
Demonstrators/Driver’s Ed Vehicles (Administrative Rule 810-6-2-.04): When an automotive
vehicle is withdrawn from a dealer’s inventory for use by the dealer or an employee, a $5
annual fee is due. The fee is not due on vehicles withdrawn from inventory for leasing or
rental purposes if the vehicle is subject to lease tax. A vehicle sold to a salesperson as a
demonstrator is subject to sales tax. A vehicle provided by a dealer to a school for driver’s
education purposes is subject to the $5 fee, but not sales tax.
Accessories (Administrative Rule 810-6-2-.02): Accessories purchased from a dealer after a
vehicle is purchased are subject to the 4 percent general sales tax rate. Accessories added
to the vehicle before the sale and added in the sales price of the vehicle are subject to the
automotive sales tax rate of 2 percent. The original invoice must show the accessory sold at
the time of the sale with the vehicle.
Adaptive Equipment (§ 40-23-4(52), Code of Ala. 1975): Equipment not generally used by
persons with normal mobility, that is appropriate for use in a motor vehicle and that is not
normally provided by a motor vehicle manufacturer, is not subject to Alabama sales tax.
However, charges on the initial sale of adaptive equipment permanently affixed to a motor
vehicle must be stated separately on the dealer invoice to the customer for such equipment
charges to be exempt.
Automobile Seat Covers, Top Linings, Vinyl Tops (Administrative Rule 810-6-1-.10):
Upholstery repairs performed on automobile seats, top linings, and vinyl tops are considered
repair jobs. The upholsterer must collect and report sales tax on the sales of items which do
not lose their identity, such as cloth, leather, vinyl, foam rubber, and springs. If a separate
agreement is made to sell the materials and perform the labor and service required, the
separate amount received for labor or service will not be subject to the tax. Materials which
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pass to the upholsterer's customers, but which lose their identity when used by the
upholsterer or which are inconsequential in amount such as, but not limited to, tacks, glue,
thread, binding twine, webbing, gimp tape, welting, padding, stain, and varnish are considered
to have been used or consumed by the upholsterer and are taxable at the time of purchase
by him. Any custom items that are fabricated and sold, with or without installation, such as,
but not limited to, auto seat slipcovers, boat covers, and car covers are subject to sales tax
on the full sales price without any deduction for labor or service. If stated separately, a
reasonable installation fee may be excluded from the measure of the tax.
School Buses (Administrative Rule 810-6-2-.88.02): A school bus purchased by an individual
for use under the direction of and control of a board of education is subject to sales and use
tax. School buses purchased by the school and paid for directly with school funds or
obligating school funds are exempt from sales and use tax.
Courtesy Deliveries (Administrative Rule 810-6-1-.12.01): An Alabama dealer who makes a
courtesy delivery of an automotive vehicle in Alabama for an out-of-state dealer is not the
seller and is not liable for collecting Alabama sales tax; the out-of-state dealer is the seller.
The purchaser must pay tax when registering the vehicle.
Discounts (Administrative Rules 810-6-1-.53 and 810-6-1-.54): Cash and volume sales
discounts are not taxable.
Sales to Licensed Dealers (Administrative Rule 810-6-1-.89.02): Sales to licensed dealers of
tangible personal property to be put in the stock of the purchasing dealer are not subject to
sales tax, even though that dealer may occasionally take from stock some part of the
inventory for use or consumption, whereupon, it would be taxable to that dealer. Sales to a
licensed dealer for his own use rather than for resale purposes are subject to sales tax.
Sales of New Cars to Used Car Dealers: Independent used car dealers who have valid retail
sales tax licenses may purchase new vehicles without payment of sales tax; however, the
exemption only applies if the sole intent and purpose is to place the vehicle immediately into
inventory for resale. The used car dealership must also title the new car in the name of the
dealership. If a used car dealer purchases a new vehicle with the intent for any purpose other
than a sale to the public, sales tax is due.
Dealer Transfers: A dealer transfer is usually treated as an adjustment to an inventory
account and is not charged to sales. Dealer transfers handled in this manner should not be
deducted as wholesale sales.
Fleet/Rental Company Sales (Administrative Rule 810-6-5-.09): Sales to fleets are generally
subject to sales tax unless they are made to leasing or rental companies that have an
Alabama rental tax account number and will be rented in a transaction subject to Alabama
rental tax. Sales tax is due on the sale to an unqualified out-of-state lease company that takes
possession in Alabama for leases solely outside of Alabama. In order for sales tax not to be
due on a vehicle that is going to be first registered out of the state, a drive-out certificate
should be completed at the time of the sale. Special rules may apply. Refer to the section
entitled, “Vehicle Sales to Out-of-State Residents.”
Giveaway Programs (Administrative Rule 810-6-1-.196): Vehicles withdrawn from a dealer’s
inventory to be given away as a prize or promotion are subject to sales tax based on the
cost to the dealership. The dealership is responsible for taxes on these transactions. Since it
is a gift to the customer, the customer will not owe use tax. Vehicles sold to and paid for by
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the Poarch Band of Creek Indians are not subject to sales tax if the vehicles are delivered to
reservation land.
Trade-Ins for Family Members: A vehicle may be traded-in to a dealer by the titled owner on
behalf of another individual without first being titled in the individual’s name. For example, a
father may trade in a vehicle titled in his name on behalf of his son without titling it first in the
son’s name.
Trade-Ins Made Separate from a Vehicle Purchase: A vehicle traded in without the purchase
of another vehicle is simply a sales transaction whereby a dealer is buying a used vehicle for
resale. The transaction will not be considered a trade-in and will be viewed as a separate
transaction from a future vehicle purchase and will have no effect on a future transaction.
Loaned Vehicles: A vehicle loaned by the dealership to a celebrity spokesperson or other
person supplying a business or service to the dealership is subject to rental tax on the value
of the vehicle.
Vehicles Loaned to Universities/Coaches: Vehicles loaned to college sports teams and their
coaches free of charge that remain in the inventory of the dealer for sale and display dealer
tags are not subject to sales tax, but the dealer must pay the $5 annual demonstrator fee.
Sales in Interstate Commerce (Administrative Rule 810-6-3-.35.02): Sales are considered to
be made outside of Alabama and are not subject to Alabama sales tax where the seller is
required by the sales agreement to deliver the goods outside the state using seller’s
equipment, common carrier or U.S. Postal Service, or independent trucker. It is also exempt if
the buyer contracts with a common carrier or the Postal Service to accept delivery of goods
in the state for delivery outside the state. When a buyer or an agent of the buyer, who is not a
common carrier, takes actual possession of the goods in the state, the goods are subject to
sales tax. (Shipping documents must be maintained by the dealer to substantiate mode of
delivery.)
Out of State/City/County Deliveries (Administrative Rule 810-6-3-.03.02): When a dealer
sells an automotive vehicle and delivers it outside of the state, city, or county where the
dealership is located, the dealer and the customer must complete the form “Certificate of
Exemption-Out of State/City/County Delivery.” The dealer must maintain a copy of the
form to substantiate the tax exempt sale. Dealers may print a copy of the form at:
https://www.revenue.alabama.gov/wp-content/uploads/2021/10/stex1.pdf.
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Vehicle Sales to Out-of-State Residents (Administrative Rule 810-6-3-.42.03) : Residents of
other states that do not allow Alabama vehicle purchasers to purchase a vehicle without the
payment of tax to that state for first titling and registering in Alabama will be required to pay 2
percent to the state of Alabama when those residents purchase a vehicle in Alabama. Dealers
will not be required to collect any city or county taxes on these sales if they use Form DOC-1
7/22 entitled “Automotive Vehicle Drive-Out Certificate for Nonresidents”. Additionally, sales
tax collected on these sales cannot exceed the amount of sales tax that would otherwise be
due in the state where the vehicle will be registered or titled for first use. Dealers should follow
the Alabama sales tax rules when calculating the tax.
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This partial exemption law does not impact lease or rental tax.
Alabama sales tax must be collected on sales to residents of the following states at the
rates listed below:
STATE
STATE
ABBREVIATION
SALES TAX DUE TO STATE OF
ALABAMA
Arizona
AZ
2%
California
CA
2%
Florida
FL
2%
Indiana
IN
2%
Massachusetts
MA
2%
Michigan
MI
2%
South Carolina
SC
2% (capped at $500)
ALDOR will annually publish a list of states that do not allow a full exemption to Alabama
residents purchasing vehicles in those states. That list, which will be posted on ALDOR’s
website, may be relied upon by dealers, and should the list be incorrect, dealers will be
relieved from liability.
Examples of Taxation Options
Florida Resident Purchases Vehicle from Alabama Dealer
Option 1: Florida resident takes possession at Mobile, Alabama, dealership:
Alabama dealer collects state, city, and county sales taxes.
Option 2: Florida resident takes possession at Mobile, Alabama, dealership:
Alabama dealer collects the 2 percent Alabama sales tax but does not
collect city of Mobile and Mobile County sales taxes by completing form
DOC-1 7/22 if the vehicle is removed from the Alabama within 72 hours.
Dealer should retain this form in the dealer’s files or where other tax records are
maintained. Florida will give the Florida resident credit for the 2 percent
sales tax paid to Alabama.
Option 3: Alabama dealer delivers vehicle to Florida resident outside Alabama:
no state, city, or county taxes are collected and
at the time of delivery, dealer completes the “Certificate of Exemption-
Out of State/City/County Delivery” form. Dealer should retain this form in
the dealer’s files or where other tax records are maintained.
Option 4: Alabama dealer delivers vehicle out of state in dealer’s equipment or by
common carrier: no Alabama taxes collected. Dealer should retain proof
of delivery in the dealer’s files or where other tax records are
maintained. That proof could include a Certificate of Exemption-Out of
State/City/County Delivery” form, affidavit signed by the purchaser
when the vehicle is delivered, an invoice from the third-party common
carrier that delivers the vehicle, etc.
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(Note: Some dealers have historically sent the title, registration documents, and a check for
sales tax to the county official in the purchaser’s home state to ensure that the vehicle is
registered and the lien perfected. If the purchaser from one of the states listed above takes
possession of the vehicle in Alabama, the dealer must collect the 2 percent Alabama state
sales tax. For example, for sales to Florida residents, the dealer could collect 2 percent for
Alabama and send a check for 4 percent to Florida. To avoid collecting county and city sales
taxes, the dealer should continue to use form DOC-1 7/22.)
Alabama Resident Purchases Vehicle from Florida Dealer
Option 1: Florida dealer delivers vehicle out of state: no Florida taxes collected.
Option 2: Alabama resident takes possession at Florida dealership:
If a Florida dealer sells a vehicle to a resident of another state that imposes a
sales tax of less than 6 percent (Florida vehicle sales tax rate) and the buyer
takes possession of the vehicle in Florida, the buyer’s home state sales/use tax
rate may be applied to the sale.
For example, an Alabama resident would sign an affidavit and pay 2 percent
sales tax to Florida because Alabama has a 2 percent state sales tax rate on
motor vehicles. The Alabama resident must still pay applicable local (county
and city) sales/use tax at the time of registration in Alabama. Credit is given for
the 2 percent state sales tax paid to Florida, so no state sales/use tax is due in
Alabama.
Vehicle Sale to Out-of- State Residents of Reciprocating States (States not on the List Above)
The Automotive Vehicle Drive-Out Certificates for Nonresidents form may be used for
sales of automobiles, motorcycles, trucks, truck trailers, travel trailers, campers,
housecars, or semitrailers that will be (i) registered or titled outside Alabama and (ii) are
exported or removed from Alabama within 72 hours by the purchaser or purchaser’s agent
for first use outside Alabama.
The Automotive Vehicle Drive-Out Certificates for Nonresidents form may not be used for
the sale of mobile homes, all-terrain vehicles, or boats. State, city, and county sales taxes
must be collected on the sale of these type of vehicles to any out-of-state purchasers.
Note: The Automotive Vehicle Drive-Out Certificate must be executed by both the seller and
the purchaser at the time of sale. Certificates completed after the transaction is concluded
will be invalid. The certificate must be retained in the seller’s records along with the
corresponding sales invoice and if applicable, the additional documentation. The seller will
be liable for the Alabama sales tax on any sale for which the Drive-Out Certificate of
Exemption has been claimed, but the required records are not maintained.
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Dealers may change the printer settings to print “portrait” so that the form is a standard
8”x11” form.
Heavy Duty Truck Transactions
Truck Bodies (Administrative Rule 810-6-2-103): A truck body which is not a part of an
automotive vehicle at the time of the purchase is taxed at the general 4 percent rate.
However, if a truck chassis and truck body are purchased out of Alabama in separate
transactions but are assembled into a unit for importation into Alabama, the applicable tax
would be the automotive rate of 2 percent.
Federal Excise Tax (Administrative Rule 810-6-4-.07.05): A truck dealer who bills and collects
the federal excise tax from the customer and remits it directly to the federal government is
not required to collect sales tax on the federal excise tax.
Finance and Insurance Transactions
Warranties/Extended Service Contracts (Administrative Rule 810-6-1-.186.05): Sales tax is
not due on the sale of a warranty or extended service contract; however, parts used in
performing repairs under the contract are taxable based on the cost of the parts to the dealer.
Sales or use tax is not due on parts used in performing repairs free of charge for a customer
under the terms of a manufacturer’s extended warranty or service contract, when the
manufacturer provides full credit to the dealer performing the repairs. Labor costs that are
separately stated are not taxable in either case.
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Tire and Wheel/Dent and Ding/Road Hazard: These products are taxed like service contracts.
Sales tax is not due on the sale of the contract, but parts used to perform the repairs are
taxable. Labor costs that are separately stated are not taxable.
Window Etching: Window etching is a service and is not subject to sales tax.
Dealer Fees (§ 40-23-2(4), Code of Ala. 1975): Dealer fees (also known as clerical fees, doc
fees, dealer prep charge, processing fees, etc.) are taxable at the automotive rate. If clearly
labeled and separately stated, the title fee is not subject to sales tax. If not separately stated,
it is taxable.
Debt Waiver/GAP Insurance: These items are not subject to sales tax.
Key Replacement Programs: Key replacement programs are taxed similar to service
contracts. The key replacement contract is not taxable, but parts used to perform repairs or
replacement are taxable.
Maintenance Agreements (Administrative Rule 810-6-1-.186.05): If a maintenance
agreement is required and mandatory as a condition of a sale, sales or use tax is due on the
purchase of or withdrawal from inventory of parts used in performing repairs or services
pursuant to the maintenance agreements. Tax is to be computed on the cost of the parts to
the dealer. In Warrior Tractor & Equipment Company, Inc. v. State of Alabama, the ALJ
determined, “Because the Taxpayer factored the cost of the filters into the cost of the
equipment, the Taxpayer was selling the filters to its customers with the equipment per the
Logan’s Roadhouse rationale.” Based on this case, the oil filters used in the free oil change
services will not be subject to tax if the service is part of the sale, and the cost is figured into
the selling price of the vehicle.
Service/Parts/Body Shop Transactions
Automobile Repair Shops: The retail sales to a consumer of parts, batteries, tires, etc., are
taxable. Labor is not taxable if separately stated. Supplies consumed by the repair shop such
as paint and solder, as well as tools and machinery used, are taxable at the time of the sale to
the repair shop and collected by the supplier or paid to ALDOR as use tax if the supplier is
not licensed to collect sales tax.
Automotive Supply Jobbers (Administrative Rule 810-6-1-.08.01): Automotive supply
jobbers (anyone who makes retail sales of auto parts and supplies) must collect sales or use
tax on sales to all customers who do not have a valid sales tax number or certificate of
exemption. Invoices that do not show the purchaser’s name but are made out to “cash” are
always taxable. Sales to purchasers with sales tax numbers are only tax free if the items are
being purchased for resale. It is the responsibility of the jobber to know the nature of the
customer’s business, so that the jobber will know when to collect sales tax on items
purchased for use.
The automotive jobber must collect sales or use tax on sales of supplies unless the customer
is purchasing the supplies for resale. Supplies include but are not limited to cleaning
compounds, chamois, rags, drill bits, shop files, welding gases and supplies, metal bars and
rods, masking tape, fire extinguisher fluid, hydraulic jack oil, friction tape, signs, white sidewall
cleaner, brooms, mops, window cleaner, rivets, tacks, cotter pins, repair parts for shop
equipment, degreaser, bolts, nuts, washers, screws, oil measures, wiping cloths, drop light
cords, auto body soap, hand soap, vixen files, light bulbs, rubbing compound, floor oil
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absorbent compounds, brushes of all kinds, tar remover, and polishing cloths. Sales of any
new, used, or rebuilt automotive parts are taxed on the net trade difference. Sales or use tax
is due on taxable sales of batteries without any deduction for the trade in. If labor is
performed in connection with the sale of repair parts, invoices covering the transaction must
clearly show the amount charged for each part and the amounts charged for labor. The
amount charged for labor is not subject to sales or use tax. If the invoices are not itemized,
the entire amount of the transaction is subject to tax. (Note: Dealers should refer to the rule
for additional information concerning this complicated area.)
Retail Sales of Parts and Accessories (Administrative Rule 810-6-5-.04.02): The sale of parts
and accessories to retail customers at the dealership are subject to state, city, and county
sales tax where the dealership is located. The sale of parts and accessories to retail
customers in other cities and counties where the dealership delivers the parts in a dealership
owned vehicle are subject to state sales tax plus the applicable city and county taxes where
the customer is located and must be collected by the dealer. The same is true if a dealership
salesperson calls on customers in other cities and counties irrespective of how the parts are
delivered. If parts are sold to retail customers in other cities and counties where the dealer
has not established nexus and delivery is made by common carrier (i.e., postal service, UPS,
Fed Ex., etc.), the transaction would be subject to state sales tax, but not the city and county
where the customer is located. The customer would be responsible for accruing and paying
the local city and county use taxes.
(Note: Sales to licensed wholesale customers, such as another dealership or independent
repair facility, that will use the parts on customer cars and charge sales tax on the parts are
not subject to state, city, or county sales taxes.)
Parts Used to Recondition or Repair Dealer-Owned Vehicles (Administrative Rule 810-6-1-
.116): When a licensed dealer purchases parts and materials to repair or recondition vehicles
held in inventory for sale, the purchases are tax-free if they become part of the vehicle that
will later be sold and taxed on the total sales price. Parts and materials used to repair or
recondition vehicles for others are taxable. “Materials” mean items such as paint, body lead,
and wax which become part of the reconditioned vehicle. Supply items not becoming part of
the vehicle such as sandpaper, masking tape, and rags are taxable retail sales when
purchased by the dealer. “Parts” mean such items that are passed on substantially intact by
the dealer, such as fan belts and batteries. Labor charges are not taxable if separately stated.
Automobile Painting (Administrative Rule 810-6-1-.06): The painting of an automotive vehicle
is a service by the painter and not taxable; however, the paint, supplies, etc., used or
consumed by the painter are taxable when sold to the painter.
Bedliner Chemicals: Bedliner chemicals are taxable to the franchisee creating the bedliner,
not the customer. (Alabama Tax Tribunal Docket No. S. 18-369LP)
Gasoline, Motor Fuel, and Lubricants (Administrative Rule 810-6-3-.28): Gasoline and similar
substances and lubricating oil and greases are exempt from sales and use taxes. Diesel and
other similar substances, otherwise taxed, are not subject to sales and use taxes.
Oil Filters: Oil filters are subject to sales taxes. See the section entitled “Warranties/Extended
Service Contracts” and “Maintenance Agreements” for information on taxability of oil filters
used for warranty repairs, service contracts, or maintenance agreements.
Cores: (Administrative Rule 810-6-1-.08.01) Sales of any new, used, or rebuilt automotive
parts are taxed on the net trade difference; however, sales or use tax is due on taxable sales
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of batteries without any deduction for the trade-in.
Lubricating Oil (§ 40-23-4(a)(1), Code of Ala. 1975): Lubricating oil is subject to the excise tax
levied in § 40-17-171 and § 40-17-220, Code of Ala. 1975. Lubricating oil is not subject to
sales tax when the excise tax has been paid.
Oil Additives: Additives to oil will be subject to sales tax or motor fuel tax. The additive is
subject to excise tax if the additive is a substitute for oil. Products are either taxable as excise
tax or sales tax but not both.
For Example:
Excise Taxable Sales Taxable
Motor Oils Hydraulic Oils
Grease Brake Fluids
Transmission Fluid Power Steering Fluid
Rerefined Oil Antifreeze
2 Or 4 Cycle Oil (No Fuel Mixture) Carburetor Cleaner
Synthetic Oils Fuel Additives
Bar & Chain Oil Engine Degreasers
Machine Oil (Usage) STP Gas Treatments
Tractor Hyd/Trans Fluid* (Tdh) STP Oil Treatments
Engine Slick WD-40
Slick 50** Cutting Oils
STP Engine Treatment** Rust
Preventatives
T-Plus** White Oils
Sewing Machine Oil Process Oils
Engine Armour** Metal Working Oils
Torque Fluid 2-Cycle Gas/Oil Mix***
Turbine Oil 4-Cycle Fuel Only****
Nu Power**
*Must Have The Word Transmission Fluid On Package. Product Also Known
As Universal Tractor Hydraulic.
**Products Are Substituted For 1 Quart Of Regular Engine Oil.
***Ex. 50:1, 40:1, Etc.
****Ex. Ethanol Free 92+ Octane Fuel Synthetic Oil Mix Listed As Product Overview
Warranty Parts (Administrative Rule 810-6-1-.186.05 and 810-6-3-.73 ): Parts taken from the
dealer’s inventory used to fulfill original or extended manufacturer’s warranties are not
subject to sales tax. A flat deductible charged to the customer has no bearing on the tax
status of the parts, if the dealer receives full credit for the parts from the manufacturer. When
a dealer uses parts in repair work pursuant to any warranty agreements other than those
granted by the manufacturer, the parts used in the repair are subject to tax.
Sublet Repairs (Administrative Rule 810-6-1-.141): A dealer who sublets all or part of a repair
job purchases the parts at wholesale tax-free to be installed by the outside subcontractor;
however, sales tax should be collected on the retail price of parts when billed to the
consumer. Labor charges are not subject to sales tax if separately billed. A subcontractor
who consumes materials and supplies, such as paint, are subject to tax on the cost of the
materials and supplies at the time of purchase by the subcontractor.
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Freon: Freon may be purchased tax-free to be used to repair a vehicle in a dealer’s inventory
if it becomes a part of the vehicle that will be resold. Freon used to repair or recondition
customers’ vehicles are subject to sales tax.
Shop Supplies (§ 40-23-1(6), Code of Ala. 1975): Shop supply fees included on an invoice
with a retail sale of property are subject to sales tax.
Wheel Weights: Wheel weights may be purchased tax-free if used to balance the tires on
vehicles in inventory that are resold; however, those used in servicing customers’ vehicles
are subject to sales or use tax.
Pollution Control Devices (Administrative Rule 810-6-3-.46): Parts that are primarily used for
pollution control, such as catalytic converters, are exempt from sales and use tax.
Returned Merchandise (Administrative Rule 810-6-1-.147): When property is returned by the
purchaser and the seller refunds the full amount paid, there is no sale and the sales price of
the returned property is not to be included in the gross proceeds of sales. However, when
property is returned and a part, but not all, of the sales price is refunded, the full sales price is
to be included in the gross proceeds of sales. This would include, but not be limited to,
property returned, and a restocking fee is charged before refunding the balance of the
purchase price. Furthermore, if the property returned was previously purchased for resale,
tax exempt, no sales tax is due on a restocking fee charged before refunding the balance of
the purchase price.
Use Tax
Use tax is designed to prevent out-of-state vendors from having an unfair competitive
advantage against in-state vendors who must collect sales tax. The liability for paying use tax
falls on the purchaser if the vendor from whom a dealer purchases items to be used by the
dealership does not collect sales or use tax. It is the responsibility of the dealer to register for
a use tax account to self-assess and report use tax due directly to ALDOR. City and county
use tax is also due.
Examples of items on which use tax might be due include computers purchased from out of
state companies to be used at the dealership, shop equipment, advertising supplies, office
supplies, shop supplies, etc. The majority of any large liability for use tax will be on new
dealership construction or renovations where items are purchased out of state and sales or
use tax was not collected at the time of purchase.
Simplified Sellers Use Tax Program (SSUT): The SSUT program allows an out-of-state eligible
seller to collect, report and remit a flat 8 percent tax on sales made into Alabama, regardless
of the locality shipped to in Alabama. However, sales of automotive vehicles are not included
in the SSUT program, and the sales tax collected on sales of automotive vehicles should
continue to be collected at the current state and local rates.
Use tax is not due on items purchased for resale.
Use Tax Filing: To use file taxes, go to www.myalabamataxes.alabama.gov.
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Lease/Rental Tax
(§ 40-12-222, Code of Ala. 1975/Administrative Rule 810-6-5-.09)
The leasing or renting of any automotive vehicle, truck trailer, semitrailer, or house trailer is
subject to lease tax at the state rate of 1.5 percent of the gross proceeds of the lease.
Leases of automotive vehicles to the state, cities, or counties are taxable to the lessor.
However, the gross proceeds accruing from a motor vehicle lease transaction for at least
180 days with the federal government, or any state, county or municipal entity within the
state, including a public school board or an individual public school, or any entity eligible for a
sales tax exemption under federal law or § 40-23-5, Code of Ala. 1975 is exempt from lease
tax.
Many cities and counties also impose a lease tax. Those rates may be obtained
at https://www.revenue.alabama.gov/sales-use/tax-rates/.
Lease tax is levied against the lessor (leasing company) and not the lessee (customer);
however, the tax may be passed on to the customer. The tax that is passed on, however, must
be included in the monthly taxable gross proceeds subject to lease tax. In other words, lease
tax is a tax due on the total amount received.
Example:
$500 monthly automotive lease tax payment
x1.5% state lease tax
$507.50 lease payment with tax to consumer
x1.5% state lease tax
$7.61 amount due to state from lessor
Short Term Leases: On vehicles leased to customers from a fleet of rental cars, lease tax is
due on the total rental contract, including insurance, damage waiver, etc. even if separately
stated on the contract. Local tax rates are based on the location of the leasing company.
Long Term Leases: In long term leases with an option to purchase at the end of the lease, the
typical transaction involves the leasing dealership, the leasing company to which the lease is
assigned by the dealer, and the customer. In this type of transaction, lease proceeds are
usually received by both the dealership and leasing company.
A. Taxable Proceeds at Dealership: Capitalized cost reductions or down payments
by the customer whether by cash, manufacturer rebate, or other means are subject to
lease tax. Dealer fees are subject to lease tax. The state, city, and county lease tax due is
based on the dealership location. The first payment, including any non-recurring charges
not separately stated to the customer, made at the dealership is subject to rental tax due
by the leasing company and is based on the customer’s garage location of the vehicle.
Bear in mind, some separately stated non-recurring charges could be subject to the
leasing tax when the charge adds value to the lease. (Example: The dealer tinted the
windows at the customer’s request and added a one-time charge to the lease.)
The lease tax law does not allow a deduction for trade-ins, as in the sales tax law. If the
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customer trades in a vehicle that he owns and applies his equity in the vehicle as all or part of
a cap cost reduction on the new leased vehicle, that amount is subject to lease tax. The net
amount (vehicle ACV less any lien payoff) allowed for the trade-in constitutes gross receipts
derived from the lease and is subject to lease tax. The dealership’s records should clearly
indicate the lien payoff by the dealership and the net trade-in allowance calculation. If the
trade -in allowed has negative equity and that amount is added back to the price of the vehicle
to be leased, the negative equity amount is subject to lease tax.
B. Taxable Proceeds Received by Leasing Company: When the dealership sells or
assigns the lease to a leasing company, the leasing company would owe rental tax on the
first payment made at the dealership and the subsequent monthly amounts received from
the customer based on the customer’s garaging location of the vehicle.
(Note: The guidelines discussed in A and B above are applicable when the dealership writes
up the lease in its name, receives the down payment, and then sells or assigns the lease to a
leasing company. However, if the dealer is acting as an agent of the leasing company, the
leasing company is liable for all rental taxes due on the transaction including rental tax on the
cap cost reduction and the first payment if taken at the dealership.)
Security Deposit: A refundable security deposit is considered part of the lease proceeds.
Lease tax can be charged when the deposit is received, then refunded when it is returned at
the termination of the lease. Another option would be for the lessor to defer payment of the
tax on the security deposit until the termination of the lease. If the lessor retains the deposit,
lease tax would be due on it at the termination of the lease.
Dealer Loaner Vehicles: If a dealer loans a vehicle out of its inventory, the customer is not
charged, and the dealer is not reimbursed by the manufacturer, no lease tax is due. If the
customer is not charged, but the dealer is reimbursed by the manufacturer, lease tax is due
on the amount paid to the dealer. Even if the dealer has a separate loaner vehicle entity, lease
tax is due if the entity is reimbursed by the manufacturer. The same is true for a vehicle
loaned under an extended warranty or service contract; if the dealer is reimbursed, tax is due.
Loaners from Rental Car Companies: If a dealer arranges a loaner vehicle for a customer
through a separate rental car company (i.e., Enterprise) and the dealer is reimbursed from
the manufacturer, the dealer should provide the rental car company with the dealership’s
rental tax number. The rental car company would not collect rental tax from the dealer, but
the dealer would pay rental tax on the amount reimbursed by the manufacturer. If the dealer
does not have a rental tax account, the dealer would pay rental tax to the rental car company.
Leasing to someone in another state/delivery: There is no drive-out provision for
lease/rental tax. If a customer picks up a vehicle in Alabama, the transaction is taxable in
Alabama. Refer to the section entitled “Taxable Proceeds Received by Leasing Company.”
Fleet/Rental Company Sales (Administrative Rule 810-6-5-.09) : Sales to fleets are generally
subject to sales tax unless they are made to leasing or rental companies that have an Alabama
rental tax number and are rented in a transaction subject to Alabama rental tax. Sales tax is
due on the sale to an unqualified out-of-state lease company that takes possession in
Alabama for a lease solely outside of the state. A drive-out certificate should be completed at
the time of the sale if the vehicle is going to be first registered out of state for no sales tax to
be due on such a transaction. Special rules may apply. Refer to the section entitled “Vehicle
Sales to Out of State Residents.”
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Sale of a Previously Leased Vehicle: If an automotive vehicle that was previously leased is
later sold, sales tax is due on the gross proceeds of the sale.
Proceeds Received by the Lessor (Administrative Rule 810-6-5-.09.01)
The gross proceeds received by the lessor for services provided which are incidental to the
lease and included in the lease agreement are subject to lease tax, even if the charges for
such services are separately stated. When under a separate optional agreement, the lessor
of tangible personal property performs independent services that are separate, distinct, and
not incidental to the leasing of the property, the gross proceeds from those services are not
subject to lease tax if separately stated.
When a lessor requires maintenance of the item leased as part of the leasing contract, the
gross proceeds derived from the maintenance charge are subject to lease tax. Tax is not due
on a separate, optional maintenance contract.
If delivery and pickup charges are part of the lease agreement, they are subject to lease tax.
If those charges are imposed in a separate, optional agreement, they are not taxable.
Lease Tax Filing: To file lease taxes, go to www.myalabamataxes.alabama.gov.
Casual Sales and Use Tax
Casual Sales and Use taxes (§ 40-23-101, Code of Ala. 1975) are designed to uniformly tax all
vehicle sales and purchases that are not otherwise taxed. This commonly involves sales
between individuals. The tax rates are the same as the sales and use tax rates.
Licensed dealers are required to collect sales taxes for the state, city, and county. If an
individual purchases a vehicle other than at wholesale from any seller in Alabama that is not
a licensed dealer or from outside the state of Alabama, the purchaser must pay both state
and local use tax when registering the vehicle with the county licensing official in the county
where the purchaser resides.
Sales And Use Tax Direct Pay Permit
(Administrative Rules 810-6-4-.14 and 810-6-5-.11.05)
ALDOR may issue a Sales And Use Tax Direct Pay Permit to manufacturers to purchase tangible
personal property without the payment to the vendor of the sales tax, and providing for such
manufacturer to report and pay such tax directly to ALDOR, in instances where ALDOR determines
that it is practically impossible at the time of purchase for such manufacturer or his vendors to
determine with any degree of certainty the applicability of such tax, and that such provisions will
facilitate and expedite the collection of the tax which may be due from such consumer. Automotive
vehicles purchased by direct pay permit holders from in-state licensed dealers should be purchased
tax-free and the sales tax reported directly to ALDOR by the permit holder under the direct pay permit
account.
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Sales And Use Taxes on Electric Vehicles
Licensed dealers are required to collect sales taxes for the state, city, and county on electric vehicles.
Funds received for allowing someone to charge their vehicle are not subject to sales or use tax, since this
is a service.
The operator of such services should pay taxes on all tangible personal property they consume, and the
utility company should be taxing the seller of this service on the electricity.
§ 40-12-242, Code of Ala. 1975, that deals with the license taxes and registration fees of private
passenger automobiles and motorcycles; electric vehicles and the Electric Transportation Infrastructure
Grant Program provides the state, counties, and cities with a revenue stream from the registrations of
these type of vehicles.
This report is intended to provide information to automobile dealers and other recipients on the
subject matters covered. ADAA is not rendering legal, accounting, or other professional services
or advice and assumes no liability whatsoever in connection with its use. Please consult with the
dealership’s professional advisors.
