When Is Distance Learning Subject To Taxation? It depends.

When Is Distance Learning Subject To Taxation? It depends.

Just like the many employees who have been forced to adapt to remote working, students across the nation have transitioned to distance learning as a result of the pandemic. While universities have previously offered online options for a minority of classes, the pandemic has rapidly pushed the majority of instruction online.

As is the case for companies with remote workforces, universities may now be facing changed and possibly increased tax obligations. However, rules on the taxation of online schooling vary wildly by state, and if students are now located in a different state than their school because of displacement by the pandemic, it gets even more complicated.

The Role of Economic Nexus

For a breakdown of economic nexus and the impact it has had over the last two years,  please click here.

The 2018 Wayfair decision paved the way for states to implement economic nexus legislation. Today, over 40 states have implemented some form of economic nexus. In a nutshell, this allows states to require remote sellers to collect and remit sales taxes based on the seller’s economic presence alone, typically measured by way of sales thresholds or the number of sales transactions made per year.

For universities, online education and other training courses offered by these institutions may or may not fall under the purview of economic nexus, depending on the state.

In the time of COVID-19, universities may now be offering instruction in states they have not previously, or the number of students enrolled in these classes may have increased to the point of triggering economic nexus. However, the next point of contention is whether distance learning is even taxable in those specific states.

Unfortunately for universities, it will not be a single answer across the board.

Determinants of Taxability

Regardless of economic nexus, online classes being taught to in-state students may or may not be taxable, again depending on the state as well as the type of class.

In Tennessee, for example, live, instructor-led online courses are not subject to Tennessee sales and use tax, but self-paced online classes with no live instruction components are taxable.

This is an example of how removing even one element from the distance learning equation (in this case, live instruction) can change the definition of those courses from a service to a digital good, which often also changes its taxability.

Another determinant of taxability is the type of school or program that is offering the online instruction.

There are generally two categories that schools will fall into: government/non-profit institutions or for-profit/private institutions. Typically, the education tax exceptions that government/non-profit institutions enjoy are not available to for-profit/private institutions. So, when it comes to distance learning, for-profit and private institutions are more likely to face tax obligations due to online instruction.

Why Does This Matter?

You might now be wondering why this matters to anyone outside of universities or other learning institutions.

Beyond the potential changes to tax legislation as a result of the new tax burdens faced by universities, it also matters because companies that are providing the technology needed to facilitate distance learning (whether in a single sale format or SaaS) may also face increased tax ramifications.

In these instances, the impact of economic nexus and determining whether the courses will be considered taxable matters just as much to the company facilitating the distance learning as it does to the university offering the courses.

Do You Have Questions About The Taxability Of Distance Learning? Contact Monika Miles And Team.


Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.