Some online instruction is subject to sales tax in Washington and Colorado
Due to health and safety concerns related to COVID-19, some people in the United States may opt for online instruction over in-person instruction where possible. Yet switching to an online format may have sales tax consequences.
Participation and location shape taxability of instruction in Washington
Whether in person or online, some classes are subject to Washington sales tax while others are exempt. Several factors affect taxability: For online courses, the level of participation offered is generally key; for in-person instruction, what matters most is usually where the instruction takes place.
Taxability of online instruction hinges on real-time participation
If an online class is live and the instructor and students can engage in real-time participation and interaction, Washington retail sales tax typically doesn’t apply to the charges for the course. However, if real-time participation and interaction isn’t possible, charges for the class are usually taxable.
Real-time participation is what it sounds like: The instructor and participants are all present (in their respective locations) at the same time and can communicate with each other (more or less) as they would in a brick-and-mortar classroom. An online chat room doesn’t constitute real-time participation, nor does a digital help desk that supports prerecorded videos.
For example, charges for a prerecorded online exercise class would be subject to Washington sales tax. However, charges for an online exercise class with two-way audio and video connectivity would be exempt, even if participants don’t let the instructor see them sweat or hear them grunt.
Similarly, a streamed cooking class where students can be coached by the instructor are usually exempt, while charges for a livestream cooking class that doesn’t let the presenter see your messy kitchen would be taxable.
Regardless of whether real-time participation is possible, Washington’s business and occupation (B&O) tax generally applies to revenue earned from online instruction, under the service and other activities classification. Additional information can be found at the Washington Department of Revenue website.
Taxability of in-person instruction hinges on location
To determine how in-person instruction is taxed in Washington, the location of the class is often paramount.
For example, chi gong, tai chi, or yoga classes held at any space not uniquely devoted to those classes — e.g., a community center, fitness facility, gymnasium, hospital, residence, or university — are generally subject to retail sales tax. However, when held at a facility that provides chi gong, tai chi, or yoga classes only, such classes are tax free. As of October 19, 2017, the same is true for martial arts classes.
No matter where they occur, charges for chi gong, martial arts, tai chi, and yoga classes are subject to B&O tax. See the Washington Department of Revenue for details.
On-demand learning can be taxable in Colorado
According to a Colorado Department of Revenue private letter ruling dated July 21, 2021, one company’s online learning plans are subject to Colorado sales tax.
The company sells on-demand digital courses, streamed video lessons about a variety of academic subjects, professional topics, and vocational licensure preparation classes. Once subscribed to a plan, students can access the company’s platform and digital courses from either a PC web browser or, after downloading the company’s mobile app, by mobile device.
The students have access to online “tutors” that answer a certain number of automated questions as well as questions asked in “natural language.” Some tutors also provide a brief video and interactive questions. Students don’t get unlimited assistance, as “each learning plan product offers a set number of tutoring question-and-answer interactions per subscription period.”
Each digital course also comes with a written transcript of the audio and video lessons, and this is key. The Department of Revenue determined the true value of the courses lay in a student’s access to preproduced videos and transcripts. Thus, though the digital courses include services, each transaction “is more analogous to the sale of tangible personal property,” and therefore subject to Colorado sales tax.
Additional details can be found in PLR 21-005. Private letter rulings are interesting but “cannot be relied upon by any other taxpayer other than the taxpayer to whom the ruling is made.”
Other states evaluate taxability of online learning
More and more instruction has occurred remotely rather than in person since COVID-19 strapped us to our homes in the spring of 2020. Not surprisingly, Colorado and Washington aren’t the only states to weigh in on the taxability of online instruction.
North Carolina exempted digital educational content in June 2020. A few months later, in October 2020, the Tennessee Department of Revenue ruled that while instructor-led online courses are exempt, self-paced online classes with no live instruction are taxable. Similarly, Wisconsin exempts sales of live in-person and live digital online educational services but taxes sales of many (though not all) pre-recorded seminars and videos.
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