Dissecting Maryland’s Taxation of Digital Products: Part 3 – Some Continued Education and Nonprofit Organization Events are Taxable

February 15, 2022

Last year, the Maryland General Assembly enacted House Bill 932, which made the sale of digital products subject to tax. Notes accompanying the legislation indicated that changes were needed to keep pace with consumer preference for buying products in digital form. In short, Maryland’s sales tax law needed to be modernized to keep pace with, or at least not significantly lag behind, the digital economy.

In this blog, which is the third in our series of on Maryland’s taxation of digital products, we continue to discuss the Comptroller’s arguably overly-broad interpretation of the term “digital product” by focusing on the taxation of certain online education and other electronically delivered events. Part one of the series examined what is and what is not a digital product, and part two, the taxation of electronically delivered software and SaaS. The final blog will analyze the rules for sourcing sales of digital products.

With respect to online education, the Comptroller initially issued guidance (i.e., the originally published version of Business Tax Tips # 29) indicating that online elementary school, secondary school, and college classes were now subject to Maryland sales tax. This guidance was based on the Comptroller’s interpretation of the definition of “digital product” in Maryland’s sales tax law, which includes electronically delivered:

  • Prerecorded or live music or performances,
  • Readings of books or other written materials, and
  • Speeches

This interpretation of the term “digital product” was clearly not what was intended in the original legislation. Therefore, the General Assembly reacted by adding certain exclusions from the definition of “digital product” through the 2021 enactment in of Senate Bill 787.

First and foremost, the amendments exclude from taxation charges for viewing any course or lecture online by an elementary, middle school, high school, college or graduate school. However, sales tax does apply on the sale of textbooks, whether sold in tangible or digital form.

Further, online continuing education courses (i.e., courses in someone’s current or prospective occupation) are exempt from Maryland sales tax so long as the classes meet certain criteria. To avoid being subject to Maryland sales tax, the continuing education class must be live and feature an interactive element between the buyer and the instructor (e.g., a live chat function). Thus, a charge for a continuing education course that is prerecorded course or a course that consists of on-demand modules is subject to Maryland sales tax.

The last amendment added to the law exempts from Maryland sales tax charges to attend certain online seminars, discussions, or similar events hosted by nonprofit organizations or business associations. Similar to the continuing education classes discussed above, a charge to attend these events will not be subject to tax so long as the event is live and features an interactive element between the buyer and host.

Thus, the electronically delivered classes or events that are exempt from Maryland sales tax generally fall under one of the following three categories:

  1. electronically delivered elementary, secondary, and college/graduate courses
  2. electronically delivered live continuing education courses that allow for some interaction between he attendees and the instructor, and
  3. electronically delivered live events hosted by a nonprofit organization or business association that allow for some interaction between he attendees and the host

Complexities can arise in applying the continuing education or nonprofit/business association event exemptions when the event is sold for one price and includes a live portion and prerecorded portions. The revised version of Business Tax Tips # 29 provides the following example:

A for-profit company provides an instructional course to help law school graduates pass the Maryland Bar Examination. The instructional course features multiple instructional presentations delivered electronically through a video conferencing platform over an eight-week period. The majority of the instructional presentations are provided by a live instructor and attendees can interact with the instructor. Some of the presentations during the courses are prerecorded material. The company charges a one-time fee to attend the presentations. The charge is not subject to the sales and use tax because the course includes live instruction and an interactive element between the instructor and vendor.

Despite this example including some prerecorded courses, the Comptroller’s conclusion that the price of the course is not subject to Maryland sales tax seemingly hinges on the majority of the presentation being live. The example needs to be considered in conjunction with the Comptroller’s more general guidance on “bundled transactions.” That guidance provides that the entire charge for a bundled transaction (i.e., a sale of two or more items for one price) that involves the sale of a digital product and a non-taxable service or non-taxable tangible personal property is subject to tax so long as the taxable portion is not an “inconsequential element” of the sale. The example above and the general guidance on bundled transactions are somewhat difficult to reconcile, as the “inconsequential element” standard and “majority” threshold referred to in the example are not the same (i.e., a taxable portion of sale can be less than the majority of value but still not “inconsequential”).

The pandemic has significantly impacted how organizations deliver their events, with many events being offered online using varying formats. It is important for organizations and businesses to be cognizant of how the pricing and format of the delivery of these events can impact their taxability. In instances where there is a single price for an event that is part live and part prerecorded, it’s possible that the entire charge will be subject to the sales and use tax. In light of the guidance issued by the Comptroller, it seems clear that a bundled price for a series of courses or other events (e.g., and conference with multiple sessions) will be taxable if the majority of the presentations are prerecorded).

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