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Tennessee clarifies tax status of digital educational offerings

Sep 27, 2023

What are the sales and use tax implications for educational products and services offered in a digital format? The lack of clarity is a point of interest and uncertainty in many states. Tennessee recently helped define the issue in a Department of Revenue letter ruling (Letter Ruling No. 23-07) pertaining to the tax treatment of various online training products offered by an online school. The ruling addresses the tax status of the taxpayer's online licensing course, course textbooks, exam guide course and a proposed mortgage loan origination (MLO) course.

The taxpayer operates an online school offering a range of courses, including licensing courses, exam preparations and continuing education products for aspiring real estate professionals. These courses are designed to meet state educational requirements and are accessible online. Notably, the taxpayer's courses are approved by the Tennessee Real Estate Commission and the Association of Real Estate License Law Officials (ARELLO), a regulatory body supporting real estate licensing laws.

Online licensing course akin to taxable prepackaged software

The online licensing course is a key offering by the taxpayer, providing customers with prerecorded audio lectures, written transcripts, chapter quizzes and a final exam. The course does not provide any video lectures. This course is essential for individuals seeking to obtain a real estate license in Tennessee, as it satisfies the state's educational requirements. Customers pay a one-time fee for access to the course materials, which are accessible online through a web browser and can be started, stopped and restarted by customers. While the course includes instructor support via email and a Facebook group, the primary purpose is to access the computer software remotely. The ruling states that this course is subject to Tennessee sales and use tax, as it is akin to taxable prepackaged software.

Textbook exemption

The taxpayer offers course textbooks in a digital (PDF) format, compiling the lessons from the licensing courses into a downloadable document. Customers pay a one-time fee for access to these materials, which have no expiration date. The ruling categorically states that textbooks, whether in digital or physical form, are exempt from Tennessee sales and use tax. This exemption extends to specified digital goods that would be exempt if sold in tangible form.

Taxable exam guide course

Similar to the online licensing course, the exam guide course is accessed through the taxpayer's learning management system via web browser and provides text-based lessons and practice exams. It allows customers to navigate between lessons at their own pace and communicate with instructors via email and Facebook Messenger. Unlike the online licensing course, it does not include audio recordings. It also does not include any video features. As it did with the online licensing course, Tennessee determined the exam guide course was subject to sales and use tax as remotely accessed computer software.

As with the online licensing course, the ruling specifies that the addition of a live chat feature, if introduced in the future, would not change the taxability of the transaction.

Taxable proposed self-paced MLO course

The taxpayer is considering offering an MLO course in the future. This course would include 20 hours of live instructor-led classes and a self-paced, text-based module with quizzes and an automatically administered and graded final exam, accessed through the learning management system, all of which are essential for customers to meet the requirements for the national MLO licensing exam.

Just like the online licensing course and exam guide course, Tennessee determined the self-paced portion of the MLO course was subject to sales and use tax as prepackaged software, while the live instruction accessed online is not subject to sales and use tax. However, because it appears that the taxable, self-paced module is an essential part of the of the transaction, the entire transaction would be subject to sales and use tax if sold for one nonitemized price, but if sold separately, only the self-paced module would be subject to tax, and the live instruction would not.

This ruling from the Tennessee Department of Revenue demonstrates the complexity involved in determining whether a taxable product or nontaxable service is being provided. As technology evolves, states continually work to figure out how to incorporate those changes within their tax statutes and regulations.

How Wipfli can help

Keeping pace with the ways that the changing technology landscape affects sales and use taxes requires vigilance. Wipfli tax advisors stay on top of the challenges and are ready to help you navigate the full range of your state and local tax needs.

Contact us to learn more about our tax solutions.

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Austin DeMoss, MBA
Senior Manager, State and Local Tax
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