Texas Issues Sales Tax Guidance on Taxpayer’s Online Learning Platform

By: Betsy Goldstein, SALT Manager

At a glance

• The main takeaway: Texas joins other states that have provided sales tax guidance in response to a ruling request regarding the taxability of online learning platforms.
• Assess the impact: Thus far, the most complicated aspect of taxing online learning platforms is each state has different sales tax rules making it difficult for taxpayers to navigate their tax obligations appropriately.
• Take the next step: Aprio’s State and Local Tax (SALT) team can assist you with obtaining a private letter ruling from each state to gain clarity and binding guidance on your tax obligations.

Schedule a free consultation today to learn more!

The full story:

This month we follow up, yet again, on another state issuing guidance responding to ruling requests related to the taxability of six online learning plans seemingly identical to the ones we first wrote about in our July 2021 Newsletter and then again in our March 2022 Newsletter. This time, the guidance comes from a Texas private letter ruling.[1] 

A quick refresher

The taxpayer offers six learning plans that are only accessible through its online platform. The platform is a virtual learning environment that offers users access to thousands of on-demand digital courses that teach academic subjects, professional topics and vocational licensure preparation. 

Each of the six learning plans has slightly different features and target users, which includes college and college-bound students, vocational students and teachers. Generally, those features include access to the materials, course questions, interactive quizzes, online proctored exams, grading information, online tutoring and guidance counselors. Access to tutoring and guidance counselors may be limited depending on the plan, but additional tutoring interactions may be purchased. All tutoring interactions are conducted through the platform’s communication portal, which functions like an email inbox, since tutoring interactions do not occur in real-time.

The taxpayer earns revenue from monthly subscriptions to its platform, the price for which varies depending on the learning plan chosen by the user. Users subscribe and can access the platform using their computer or mobile device (the mobile app itself is free). The courses are not available to download, but in some cases, they may be temporarily cached.

Thus far, we have seen Iowa, Colorado and Wisconsin all rule differently on the sales tax treatment of the six learning plans. So, how will Texas look at the six learning plans?

Texas imposes sales tax on tangible personal property and enumerated services. One of the specifically enumerated services in Texas is data processing and information services.[2] An information service is “furnishing general or specialized news or other current information” by electronic or other means.[3]

Data processing includes, but is not limited to, “word processing, data entry, data retrieval” and involves the processing of information for the purpose of compiling and producing records of transactions, maintaining information and entering and retrieving information.[4]

The Texas ruling determined that Learning Plans A, B, C, E and F are all non-taxable services. They are not information services as the taxpayer is not furnishing general or specialized news nor are they data processing services, as the taxpayer is not gathering, compiling, or maintaining information for its customers.

The ruling concluded that Learning Plan D is a taxable data processing service since the taxpayer can create lesson plans and assignments, and then gather assignments from students and maintain and track grades, which would be considered data entry, data retrieval and maintaining information.

How do insertion orders fit into the ruling?

One piece of the ruling that we have not touched on in our other articles is an additional service offering of the taxpayer outside of the six learning plans. Here, the taxpayer sells “insertion orders” to customers which are part of an internet advertising campaign for universities where the taxpayer designs online content to attract users to a website owned by the taxpayer. A user will access the website where the taxpayer has created qualifying questions for the user to answer. Once a user provides responses, the taxpayer forwards the information to the university and the university pays the taxpayer for a certain number of “qualified clicks.” This is essentially a lead-generating service.

The Texas Comptroller determined that fulfillment of insertions orders is a taxable information service since it involves the gathering and forwarding of prospective student information to universities who pay for marketing leads on prospective students.[5]

Finally, for taxable Learning Plan D and the insertion orders, the ruling makes two additional notes: 

• First, for taxable data processing and information services, sales tax is calculated based on 80% of the total charge (i.e., 20% is not taxable).[6]
• Second, it is possible that these sales may be exempt as the state provides exemptions for governmental entities as well as religious, educational and public service organizations.

The bottom line

One of the most complicated aspects of sales tax compliance is the fact that states have different sales tax rules and may even apply similar rules differently, creating a nightmare for businesses as they try to navigate their obligations. 

Aprio’s SALT team can assist your business with analyzing the potential taxability of your products and services that are sold in multiple states, which may include pursuing a private letter ruling to obtain clear and binding guidance from each state. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Goldstein, SALT Manager, at betsy.tuck@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2022 SALT newsletter.

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[1] Texas Private Letter Ruling No. 20201207154851 (June 10, 2022).  The description of the taxpayer’s learning plans in the Texas ruling is not as robust as in the Iowa ruling, which can be accessed by clicking here.

[2] Tex. Tax Code Ann. § 151.0101(10) and (12).

[3] Tex. Tax Code Ann. § 151.0038 and Tex. Admin. Code Rule 3.342.

[4] Tex. Tax Code Ann. § 151.0035 and Tex. Admin. Code Rule 3.330.

[5] It is worth noting that Iowa, Colorado, and Wisconsin each view this marketing service as nontaxable (none of these states tax information services).

[6] Tex. Tax Code Ann. § 151.351.

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.