When to Charge Sales Tax on Online Classes

Feb 22, 2024 | Compliance, Sales Tax

Online education was already popular in the early 2000s, but during the pandemic learning new things online really blew up. Maybe it was all the people who’d never had time to stop and smell the roses suddenly finding themselves homebound. People learned new skills, and also developed new ways to teach others what they know.

Of course, whenever anybody offers a product or service for sale, there’s going to be a tax. This article explores: are online classes taxable? When do you have to charge sales tax for sharing your skills with others? You may not be surprised to learn that this is a rapidly changing area of sales tax law that course creators need to understand. 

Note: For the purposes of this article, we’re talking about online classes provided by a private business or individual, not public school or university classes.

Who has to charge sales tax?

Before we dig in, it’s good to have a refresher on who has to charge sales tax. In general, you are required to charge sales tax if your activities meet two criteria:

  1. You have sales tax nexus in a state
  2. You are selling a taxable good or service to buyers in that state

Nexus is simply a tie to a state. You have nexus if you live or work in a state, have employees in a state, have inventory in a state, or make over a certain threshold of sales in a state. 

In this instance, your “buyer” is your student in a state. Because the buyer/student’s location is considered the point of sale for an online course, you’d charge your student sales tax at the rate in their own state. Confusing? Check out our Sales Tax Concepts, Explained knowledge base for the 101 on sales tax.

Should I charge sales tax on online classes? 

As with almost every sales tax question, the answer is: “It depends.”  

Each US state makes their own rules and laws when it comes to sales tax. That means all forty-six states (plus Washington DC) that have a sales tax get to decide what is and is not taxable.  In most cases, tangible goods like a bookshelf or a dog’s squeaky toy are taxable, and services like accounting or lawn mowing are not taxable. 

If you’re teaching a class, you’re providing a service, right? So no sales tax required. 

But not so fast. These days states have become savvy to the ways that people are providing goods and services. Now that more and more commerce takes place on the internet, states have broadened their definition of what constitutes a taxable good or service. And online classes are caught in the crossfire. 

Let’s dig into how states are taxing online classes and what might change in the future. 

Live Classes vs. Pre-Recorded Classes

Is your class pre-recorded? Or do you go online live and teach? Or do you provide a little of both? States often make a distinction when it comes to live vs. pre-recorded classes.Generally, live interactive classes are treated as non-taxable services. But pre-recorded lessons are taxed as “digital products.” In state lawmakers’ way of thinking, if you’ve pre-recorded your lesson you can sell it over and over again, making it a “product.” 

Also, the above is a rule of thumb, but not applicable in all cases. For example, not all states tax digital products (yet.)  And some states require sales tax on services, even including live classes. 

Be sure to check the specific rules in each state where you have sales tax nexus. Need help? HOST has your back. Contact us today for a nexus evaluation.

Supplemental Materials May Be Taxable

If you sell books, manuals, or other tangible goods to complement your classes, these physical products are taxable in most states. Some states exempt specific items like textbooks, so verify if any exclusions apply. The digital versions of textbooks may or may not be taxable depending on the state.

Some online learning providers sell things like t-shirts, hats, keychains and other merchandise. In most cases, these items will also be taxable, though there are sales tax exemptions on clothing in a handful of states. 

Sales Tax and Online Learning “Marketplaces”

There are as many ways to give online classes as there are to do anything else on the internet. You can send out a Zoom link, live stream on your Instagram feed, or pre-record your classes. But many instructors choose to use a platform designed specifically for online classes, like Udemy or Skillshare. 

If you choose to go this route, one of the first things you want to check when vetting your online course platform is how they handle sales tax. 

Most large online learning platforms are marketplace facilitators. In a nutshell, this means that the platform is the seller of record and you, as an instructor who has created a course, are a 3rd party provider. In this case, the marketplace facilitator is required to collect and remit sales tax on your behalf in states where it is required. 

Though keep in mind that most states only require this of marketplaces that make over a certain amount of gross sales in a year. If a marketplace is very niche or small, they may not qualify as a “marketplace” under a state’s sales tax law, and you’ll still be on the hook for collecting and remitting sales tax. Never assume the platform you use to host your online classes is collecting sales tax on your behalf. 

To recap, whether or not you are required to collect sales tax on online courses depends on a few factors:

  • Do you have sales tax nexus in the state(s) where your students are located?
  • Are your classes live or pre-recorded?
  • Are your courses considered services or digital goods (or something else) in states where you have nexus? If so, does that state require sales tax on services and/or digital goods?
  • Are you offering your class through a “marketplace facilitator”? If so, do they collect and remit sales tax on your behalf? 

Like in any industry where laws are rapidly changing, knowing when to collect sales tax on online courses can be frustrating. Contact HOST today for a nexus evaluation to ensure your online classes are not just educational, but sales tax compliant.