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Jamie C. Yesnowitz
T +1 202 521 1504
T +1 312 602 8517
T +1 513 345 4540
Priya D. Nair
T +1 202 521 1546
The Tennessee Department of Revenue recently issued guidance on the sales and use tax treatment of self-study online courses and instructor-led webinars. 1
In a revenue ruling, the Department advised a taxpayer that its self-study online training courses are subject to Tennessee sales tax when sold to a Tennessee customer because they constitute remotely accessed software. However, the taxpayer’s instructor-led webinars are not subject to Tennessee sales and use tax because they constitute a sale of non-taxable service under the state’s Retailers’ Sales Tax Act.
The taxpayer, a limited liability company domiciled outside Tennessee, offers professional licensing education and test preparation services through continuing education courses and online courses to individuals on subjects such as nursing and engineering (“online training courses”). These online training courses include self-study online courses and instructor-led webinars. The online self-study courses do not have live communication with an instructor but provide written material and interactive knowledge checkpoints. Additionally, the content of the courses is only available online and cannot be downloaded on the buyer’s computer. The webinars are presented in real time, with students connecting remotely to a virtual classroom where a live instructor presents to the audience through the taxpayer’s platform. In order to take an online training course, a student has to create an account on the taxpayer’s server, sign up for a course, and pay the fee associated with the course. The taxpayer sought guidance from the Department on whether the self-study online training courses and the live instructor-led webinars are subject to Tennessee sales and use tax.
Self-Study Online Training Courses
The Department advised that the taxpayer’s self-study online training courses constitute remotely accessed software subject to sales and use tax under Tenn. Code Ann. Sec. 67-6-231(a). The taxpayer provides Tennessee users with web-based access to its platform where the users can select and pay for a specific self-study online training course. The user also accesses the self-study online training course using the platform and interacts with the computer program by reading course materials and answering questions online.
Under Tenn. Code Ann. Sec. 67-6-231(a)(1), the state taxes the “retail sale, lease, licensing or use of computer software in [Tennessee], including prewritten and custom computer software . . . regardless of whether the software is delivered electronically, delivered by use of tangible storage media, loaded or programmed into a computer, created on the premises of the consumer or otherwise provided.” Under Tenn. Code Ann. Sec. 67-6-231(a)(2), the use of computer software in Tennessee that remains in possession of the dealer is taxable if the access and use of the computer software is by a customer in the state. The Department explained that, under these two provisions, the online training courses are subject to Tennessee sales tax as remotely accessed software when sold to a Tennessee customer.
The Department advised that the instructor-led webinars are not subject to Tennessee sales and use tax. The taxpayer’s webinars allow students to access live lectures through their computer. As part of these webinars, students located in Tennessee are provided web-based access to the taxpayer’s platform where they can select and pay for courses. Under Tenn. Code Ann. Sec. 67-6-231(a)(2), the use of computer software in Tennessee that remains in possession of the dealer is taxable if the access and use of the computer software is by a customer in the state. The Department explained that, while the platform constitutes computer software for Tennessee sales and use tax purposes, and is accessed by the students from locations within Tennessee, the use of the platform by a student is “merely incidental to participating in the live class.” The Department noted that with the webinars, unlike the self-study courses, students interact with the instructor and other students rather than a computer program. As a result, students are not “purchasing use of the software” but are purchasing a service, specifically, “access to a training class.” The Department explained that Tennessee only taxes specifically enumerated services. 2
Because training services are not specifically enumerated as taxable, the Department advised that the taxpayer’s instructor-led webinars are not subject to Tennessee sales and use tax.
In 2footnotes5, Tennessee enacted the Revenue Modernization Act3
to address technological advances in the remote access and use of software over the Internet. The Act was designed to treat all computer software purchases equally for sales and use tax purposes. Although this revenue ruling is not legally binding on the Department, it provides valuable guidance to taxpayers on the sales and use tax treatment of services and remotely accessed software under the Act.4
Specifically, the Department provides key insights on the sales tax treatment of two similar types of products that have recently grown in popularity: self-study online courses and instructor-led webinars. The Department concluded that one form of instruction is taxable as remotely accessed software (analogous to the sales tax treatment of pre-packaged software accessed by a tangible medium), while the other represents a nontaxable service even though students use the taxpayer’s platform as part of participating in classes. The distinction the Department draws between the two products offered by the taxpayer appears to turn on the human interaction component of the course. The existence of human interaction in the instructor-led webinars was integral to the Department’s finding that such webinars constitute nontaxable services in Tennessee.
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