Alabama sales tax on food is being lowered

Alabama is one of just three states where groceries are subject to the state’s full sales tax rate. That will change September 1, 2023, when Alabama will begin reducing the sales tax on food. This grocery tax rate change is due to the enactment of House Bill 479, which Governor Kay Ivey signed into law on June 15, 2023.

The state sales and use tax rate for food for home consumption in Alabama is currently 4%, plus applicable local sales and use tax rates. Beginning September 1, 2023, the state sales and use tax on food will drop to 3%. Local sales and use taxes will continue to apply.

Alabama’s food sales tax will be reduced again September 1, 2024, to 2% — provided Alabama’s Education Trust Fund meets a certain growth benchmark. If the Education Trust Fund doesn’t grow as required, the state sales and use tax rate for food will hold at 3% until the growth requirement is met in a subsequent fiscal year.

For sales tax purposes, Alabama will henceforth define food like the federal Supplemental Nutrition Assistance Program (SNAP), “regardless of where or by what means food is sold.” This definition will govern both the state sales tax and local sales taxes. 

Local tax jurisdictions in Alabama have the authority to administer their local sales and use taxes because Alabama is a home-rule state. HB 479 doesn’t prevent local governments from taxing food, but it does set certain parameters for local food taxes.

The bill gives local tax jurisdictions the right to reduce the local sales and use tax on food, or to entirely exempt food from local sales and use taxes. However, localities must follow certain guidelines: A county or municipal governing body may reduce the local sales tax rate on food by 25% “in any year in which the growth in the applicable municipal or county general fund exceeds 2% over the prior year.”

If a county or municipality that lowers the local tax on food later decides to raise the local food tax, it can only increase it to the rate in effect on the effective date of HB 479 (June 15, 2023). “No additional county or municipal sales and use taxes on food may levied.”

Like every state with a general sales tax, Alabama requires out-of-state sellers to register for sales tax once their sales into the state meet a certain economic nexus threshold. The economic nexus threshold for Alabama is $250,000.

Unlike most other states, Alabama allows businesses with no physical presence in the state (i.e., remote sellers) to collect, remit, and report a Simplified Sellers Use Tax (SSUT) instead of the actual state and local sales tax rate in effect at the point of delivery. Depending on the location of the sale, the actual sales tax rate in Alabama can be as high as 11% or as low as the base state rate (currently 4%). The SSUT rate is 8%.

There’s no mention of remote sellers or the SSUT in HB 479. So come September 1, 2023, when in-state sellers start taxing food at 3% (plus applicable local taxes), remote sellers that have opted to collect the SSUT will continue to tax food at 8%. They could elect to stop using the SSUT rate, but that would come with all the expense and hassle of dealing with Alabama local sales taxes. 

Mississippi and South Dakota still tax food at the general sales tax rate in each state, though lawmakers in both states are pursuing a grocery tax reduction. Food for home consumption is also subject to the general sales tax rate in Hawaii and Idaho. However, Hawaii and Idaho provide food tax credits or rebates to qualifying taxpayers, as do Kansas and Oklahoma.

Food is subject to a reduced rate of sales tax in Arkansas, Illinois, Kansas, Missouri, Tennessee, Utah, Virginia, and Alabama (starting September 1, 2023), but there’s some fine print:

Kansas is decreasing the tax on food and will fully exempt food from sales tax starting January 1, 2025. The Kansas food sales tax credit sunsets at the end of the 2024 tax year.

Illinois is providing a temporary sales tax exemption for food from July 1, 2022, through June 30, 2023. Starting July 1, 2023, Illinois will resume taxing food at a reduced rate of 1%.

Tennessee is offering a grocery sales tax holiday for food and food ingredients, August 1 through October 31, 2023.

Virginia dropped the state sales tax rate food on January 1, 2023, but local sales taxes in Virginia still apply to food.

Most food for home consumption is exempt from state sales and use tax in the remaining states, plus Washington, D.C. Local taxes may apply in some of those states, including Arizona, Colorado, Georgia, Louisiana, North Carolina, and South Carolina.

Learn how automating sales tax calculation, collection, and remittance reduces the burden of sales tax compliance in Alabama and other states.

And if you’re not sure whether you’re required to register for Alabama sales tax, our economic nexus sales tax risk assessment can help.