Tax Management For Online Course Creators And LMS Platform Owners: What You Need to Know

Online Course Creators

As an online course creator, you have a lot of responsibilities – from being an expert in your field to creating engaging and creative courses, marketing your courses to students, and building your community. With so many things to keep track of, it’s easy to forget about tax management. But as an entrepreneur, tax management is a critical part of your business.

Tax management is the process of complying with local tax laws wherever you sell your courses, from registering your business to collecting and filing taxes. With the increasing number of eCommerce tax rules, it’s important to pay attention to this aspect of your business to avoid any issues with tax authorities and to keep your focus on course creation.

In this post, we’ll cover all the fundamentals of tax management for online course creators, including different types of sales tax around the world and how it applies to online courses.

LMS Platform

An LMS (Learning Management System) is not an online course in itself, but rather a platform used to deliver online courses. It provides a centralized platform for creating, managing, and delivering online educational content, including instructional materials, assessments, and multimedia elements. It also offers tools for tracking student progress and communication, and enables interaction and collaboration among students and instructors. An LMS can host a variety of online courses, ranging from self-paced, multimedia-based courses to live virtual classes.

The LMS market is growing rapidly and is expected to reach $28.1 billion by 2025. The growth is driven by government initiatives, digital learning adoption, bring-your-own-device policies, and the integration of Artificial Intelligence (AI) and Machine Learning (ML) in LMS. As a result, the key players in the market are seeing increased revenues. The global LMS market is expected to grow from $9.2 billion in 2018 to $22.4 billion in 2023 with a Compound Annual Growth Rate (CAGR) of 19.6%. The global elearning market is expected to increase to $15.72 billion by 2021 and the mobile learning market will be worth $38 million. The global corporate LMS market is expected to grow at a CAGR of 23% with a revenue of $12.48 billion from 2020 to 2024. Global education technology investments are expected to reach $252 billion by 2020 and the elearning market grows at 14% annually.

Types of Sales Tax Around The World

Most countries in the world apply a consumption tax to the sales of goods and services. The end customer pays the tax because they are the ones consuming the product. There are different types of consumption taxes, such as the Value-Added Tax (VAT) in the EU and the Goods and Services Tax (GST) in Australia. In the US, sales tax is regulated by each individual state, creating complexity in the US sales tax system.

Are Online Courses Taxable?

Several traits of your online course will determine whether it’s considered a digital service and, therefore, subject to consumption tax. Here’s a quick rundown of those traits and a summary of how they’re taxed.

Downloadable vs. Pre-Recorded vs. Live Webinars

Generally, live webinars are not taxed. But some places will even distinguish between streamed or downloaded, even though both are technically “delivered electronically” and considered digital goods.

Fully automated vs. Interaction with and among students

Is there an interactive element, either between other students or with the instructor? Is there a live tutoring component? Is there an evaluation that’s conducted by a human rather than a computer?

This is a key point of automation. Generally, automated online courses are subject to digital tax, whereas courses with human interaction are not.

Is the student earning credits toward a formal educational program?

If a student is working toward a degree and the course earns them credits, then typically tax does not apply. Otherwise, an online course can be considered a digital service rather than an educational service and will be subject to tax.

Are physical materials accompanying the online course?

Books or CDs that are sold or delivered in tandem with the course can be taxed.
How Online Courses Are Taxed In Specific Countries

How Online Courses Are Taxed In Specific Countries

The USA

What’s happening with U.S. Sales Tax?

Small businesses are being taken by surprise by the frequent changes in sales tax laws across the US. Keeping up with tax regulations is a challenge even for tax professionals. The reason for this complexity can be traced back to a landmark case in 2018 known as the “Wayfair Decision.”

The case saw international corporation Wayfair challenging the South Dakota state government over their efforts to hold the company accountable for taxes on sales to South Dakota residents. Previously, only in-state businesses had to deal with sales tax and online businesses were not required to pay tax.

After a two-year legal battle that made it to the Supreme Court, the ruling changed, and out-of-state sellers may now be held responsible for collecting and paying sales tax in any state. This shift has been adopted by over 30 states.

In addition, several states are introducing marketplace facilitator laws, requiring online marketplaces to collect sales tax on behalf of sellers. These states include Alabama, Connecticut, Iowa, Minnesota, New Jersey, Oklahoma, Pennsylvania, Washington, Indiana and Wyoming. Although this may sound convenient, it only covers sales tax on purchases made through the marketplace and transactions made through a seller’s own website are still their responsibility.

How Online Courses Are Taxed In The U.S.

The US sales tax laws are notoriously complicated, and it’s no different with online courses. Rules about course creators, distance learning, and webinars vary from state to state. You should check each state individually.

That said, 24 states are part of the Streamlined Sales and Use Tax Agreement (SSUTA), which means they all share the same guidelines! That provides some much-needed consistency and simplicity across half of the country, but keep in mind that each state charges tax at its own rate.

The SSUTA guidelines say the following about online courses and webinars:

Your business need only meet one of the above conditions to be exempt from sales tax.

SSUTA states include Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

All the rest of the states are hard to pin down. This is because some states use their own individual definitions of “digital service” while others don’t specify a definition at all.

States using their own definition

In addition to the general categories listed above, many states have their own special definition of digital goods and services. These include Connecticut, Illinois, Kansas, Louisiana, Maine, Mississippi, North Carolina, and Texas.

States not using any definition at all

There are some states that don’t specifically define digital goods, for example Alabama, Arizona, California, Colorado, DC, Florida, Hawaii, Idaho, Maryland, Massachusetts, Missouri, New Mexico, New York, Pennsylvania, South Carolina, South Dakota, Utah, and Virginia.

The European Union (EU)

The EU has uniform tax laws for online businesses across its 28 countries. The EU VAT guidelines for online courses state that live courses or webinars and online courses that earn educational credits for the student are not taxed. Automated, delivered electronically and without human interaction courses are taxed, and the VAT digital tax rate of the customer’s country must be charged in these cases. For complete guidelines on handling EU taxes, check out a comprehensive resource on VAT.

Automated distance teaching dependent on the Internet or similar electronic network to function and the supply of which requires limited or no human intervention, including virtual classrooms, except where the Internet or similar electronic network is used as a tool simply for communication between the teacher and student… [Courses with] workbooks completed by pupils online and marked in an automated fashion without human intervention.

EU explanatory notes

The EU VAT guidelines for online courses resemble those of the SSUTA:

In instances where VAT is applicable, you must charge the customer the VAT digital tax rate of their country of residence.

Canada

In Canada, GST and HST are applicable to digital products, and some provinces may have additional local taxes. Online courses may qualify as “intangible personal property or services,” but it’s not specifically mentioned on the Canadian tax agency’s website.

Australia and New Zealand

Australia and New Zealand follow broad GST laws for online courses, applying it to “webinars or distance learning courses” as stated on the ATO website.

Other Countries

Most other countries follow the VAT laws of the EU or US, so it is safe to assume that online courses will fall under the same guidelines. It’s important to research which countries tax digital services, as online courses would be included in that category.

How to Comply with US Sales Tax for Online Courses In 3 Steps

Complying with US sales tax for online courses is simple with these three steps:

1. Register for a Sales Tax Permit: To comply with US sales tax, you must register for a sales tax permit in each state individually. You can find the state’s Department of Revenue website on the IRS directory. Alternatively, you can use the Streamlined Sales Tax Registration System (SSTRS) to register for SSUTA states at once. You can select the relevant states for your business.
2. Charge Sales Tax to Customers: You must charge customers the state tax rate and any county or district taxes that apply in the state where they are located. The tax rate is based on the customer’s location, which is a destination-based tax. Only a few states have origin-based taxes, meaning the tax is charged based on your business location.
3. File Sales Tax Returns: Each state will assign a filing frequency when you register. It could be monthly, quarterly, or annually. Note the deadlines and pay on time to avoid penalties. Check the state’s official website for information on how to file the returns.

How to Comply with Global Tax Laws in 6 Steps

1. Track sales volume and tax liability – Stay on top of new tax obligations as your business grows by tracking your sales volume and the rules for each tax jurisdiction. Register and collect taxes when your sales pass the threshold.
2. Register for sales tax, VAT, or GST – Register through online portals or by filling out forms. Receive a local tax number and a filing frequency for reporting returns.
3. Verify customers, tax IDs, and locations – Know who you are selling to and where to properly calculate and collect the correct amount of sales tax, VAT, or GST. B2B sales may not need consumption tax and B2C sales are taxed at point of purchase. Verify business tax IDs for B2B sales. Store customer location evidence for years.
4. Calculate and collect tax – Calculate the local tax rate and apply it to taxable products. Collect the full payment from the customer.
5. Send and save tax-compliant receipts – Send tax-compliant receipts and invoices after every sale or refund.
6. File tax returns and pay when necessary – You must file tax returns in every jurisdiction you’re registered in. Returns are due periodically and may require payment if you’ve collected more tax from customers than you’ve paid on purchases. Good bookkeeping practices can help you keep track of these numbers.