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“Are online courses taxable?” This is the question on the minds of online educators in digital classrooms around the world.
Are Online Courses Tax Deductible
And it is also a crucial question. Online courses exist in a difficult gray area when it comes to sales taxes. By some definitions, they are considered an educational product; by others they are considered a digital asset. This distinction, and other finer details, determine whether you’re in tax trouble.
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Furthermore, digital tax laws are continually evolving, almost as quickly as technology is innovating. Countries are continually introducing new tax rules to capitalize on this booming economy, including the e-learning sector.
There is a lot for course creators and entrepreneurs to learn, monitor and respect. Let’s face it: You want to grow your business and focus on your students. You don’t want an unofficial degree in tax policy.
Here’s everything you need to know about the taxability of online courses, updated by our team of tax freaks.
First, it’s important to understand what is meant by “sales tax,” as it’s a generic term that actually refers to different systems. Almost every country in the world levies a consumption tax on the sales of goods and services.
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There are different types of consumption taxes, depending on the country. It can be a flat fee applied to each transaction or a percentage of the total value. Each type requires something different from you, the business owner.
But one element always remains the same. The final customer pays the tax, because he is the one who is actually consuming the final product. And it is a tax on consumption, on purchases for personal use.
Consumption taxes have different names, because each can work a little differently. There is value added tax in the European Union and goods and services tax in Australia. These are better known as VAT and GST. About 175 countries have one or the other!
The USA has its own ball game going on. The American “sales tax” is a consumption tax that is theoretically charged only once, upon the final purchase of the final product by the final consumer.
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However, the country has no nationwide sales tax. Instead, sales tax is determined and controlled by each individual state. This creates a lot of complexity in the US tax system.
Also, many US states use a secondary tax system to get more revenue from sales, called Use Tax.
The use tax is specifically designed to collect tax dollars on purchases even when businesses are not subject to sales tax in that state. Since the government cannot force them
Customers in the state must pay a small fee for any taxable products they purchase outside of the state and take home. So, in a sense, states are taxing the use of the product.
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The rule of thumb is that if you’re not liable for sales tax somewhere, then you’re probably liable to comply with the use tax rules.
This is a difficult question to answer, as online courses seem to exist in the gray area between “educational service” and “digital service”. They are educational
The answer also depends on where your customer is. Each country has its own policy. Whether you sell in the US, EU, Canada or India (or anywhere else!), you should check out the definition of local policy online courses and determine if the digital tax rules apply to your business.
Tax-exempt educational services essentially include everything to do with primary and secondary education; lectures at schools, colleges or universities; courses that contribute to the curricula of accredited organizations.
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, all courses that prepare a student for a particular profession or trade. For example, the European Commission describes it as “directed towards an occupation and its associated skills”.
Include any courses taken for recreational or personal development purposes. If someone wants to learn a skill for purely personal reasons, such as photo editing or how to plan their finances, these courses would not be tuition-free.
And to explain exactly why, we first need to establish what exactly a “digital service” is. There are other terms used as well, such as:
They are all essentially the same thing. For the sake of this section, we’ll continue with the term “digital service.”
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The truth is that the definition of “digital service” is elastic. Any place you go in the world, and within the 50 US states, will have its own version of the definition. For example, some jurisdictions include online newspaper subscriptions and other places do not.
You receive it via the internet. It arrives in an email, or you download it from a website, or access it by logging into an online portal. This product was born and lives in the digital space.
Here is a list of the common ones on the market today. BUT – as the definitions can be quite detailed and varied, don’t assume that everything on this list is considered a “digital service” anywhere.
Certain traits of your online course will determine whether it is considered a digital service and therefore subject to sales tax, VAT, GST or any other consumption tax. Here’s a quick rundown of these traits and a general summary of how they’re taxed.
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In general, live webinars are not taxed as digital products. BUT some places will differentiate between streaming or downloading, even though both are technically “electronically delivered”. The first denotes
Is there an interactive element, between other students or between students and the instructor? Is there a live tutoring component? Is there an evaluation conducted by a human being and not by a machine?
Automation is a key factor. In general, automated online courses are subject to digital tax, while courses with human interaction are not.
Books or CDs sold or delivered with the e-course may be taxed. This is because these easily qualify as tangible assets.
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Essentially, if your course is pre-recorded, there’s no way for students to interact with each other (or you) during the course and assessments are automatic, so it’s considered a digital service and is subject to sales tax .
Thankfully, the Simplified Use and Sales Tax Agreement exists to standardize US tax policy as much as possible. Twenty-four states have adopted SSUTA guidelines for online courses and webinars, which are as follows:
SSUTA states include Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia , Wisconsin and Wyoming.
All other states are difficult to define. This is because some states use their own individual definitions of “digital service” and others do not specify a definition at all.
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In addition to the general categories listed above, many states have their own special definition of digital goods and services. These include: Connecticut, Illinois, Kansas, Louisiana, Maine, Mississippi, North Carolina and Texas.
There are some states that do not specifically define digital goods, for example: Alabama, Arizona, California, Colorado, D.C., Florida, Hawaii, Idaho, Maryland, Massachusetts, Missouri, New Mexico, New York, Pennsylvania, South Carolina, South Dakota , Utah or Virginia.
For information on each state’s sales tax rules, see the sales tax guides for each US state.
Important note: given the growth rate of the digital economy, all states that do not currently tax digital services will likely find a way to do so very soon. These rules evolve rapidly. It’s best to double check wherever you are selling!
Tax Deduction At Source
When it comes to online courses, here is information from the source itself. (The language of politics is still a little hard to understand, but we’ll break it down for you.)
“Automated distance learning that depends on the Internet or a similar electronic network to operate and the delivery of which requires little or no human intervention, including virtual classrooms, except when the Internet or a similar electronic network is used simply as a means of communication between the teacher and student… [Courses with] workbooks completed by students online and automatically marked up without human intervention.”
* While live courses and webinars may not be taxed as “digital goods”, they may fall into another taxable category, depending on your local EU VAT rules. Always check where you sell!
In Canada, nationwide GST and HST rules include digital products, and some provinces also have their own local additional taxes. There is a possibility that your classes may qualify as “intangible personal property or services,” although online courses in particular are not mentioned on the Canadian Tax Agency website.
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Most other countries follow the US and EU cues when it comes to digital taxes. So one might assume that the same guidelines regarding e-learning products and online courses apply in other parts of the world.
Here is a map below, to help you assess your tax liability at a glance. However, global digital tax rules are constantly evolving, so you should double check in each of the other countries where you sell your products.
Just because a country taxes online courses doesn’t necessarily mean you need to start adding taxes to your sales!
Your sales tax liability depends on how much you sell,
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