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Online course creators have a lot going on – maintaining their expertise, crafting creative and engaging courses, marketing those courses to students, and building their communities.
Running a successful business is hard but exciting! What doesn’t always cross the mind of a business owner in this exciting moment is… taxes. While hustling to stay on top of every other element of your growth, you might forget about tax management.
What Is Tax Management?
Tax management is the process of complying with local tax laws wherever you sell, from preempting your tax liability to registering to collecting and filing. With eCommerce tax rules on the rise, it’s high time you pay attention to this part of your business. Unless, of course, you plan on offering only free courses.
Good tax management means that you can grow with confidence that your business is on the right side of the law! And it also means you save yourself a ton of time and stress.Tax management is essential, not only so that you can avoid issues with tax authorities, but also so that you can focus on course creation — and not on monitoring and memorizing tax laws.
We know how difficult this can be as a small business owner or digital entrepreneur. That’s why we’ve summarized all the fundamentals you need in this post, including some great resources for learning more.
Let’s get started!
Types Of Sales Tax Around The World
Nearly every country in the world applies a consumption tax to the sales of goods and services.
There are different kinds of consumption taxes, depending on the country. But one element always stays the same. The end customer pays the tax because they are who’s actually consuming the end product. And it’s a tax on consumption, on buying for one’s personal use.
Consumption taxes go by a few names, and they each function a little differently. There’s the Value-Added Tax in the EU and the Goods and Services Tax in Australia. These are better known as VAT and GST. Most countries have one or the other.
The United States has a system of its own. US sales tax is charged once, at the final purchase of the product by the end consumer. The country has no national level sales tax. Instead, sales tax is regulated by each individual state. This creates a ton of complexity (and confusion!) 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
The US
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 EU
Fortunately, the EU tax laws for online businesses are uniform across all 28 countries! Though the language is still pretty dense. Here it is from the source:
“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
Right… Basically, the EU VAT guidelines for online courses are very similar to those of the SSUTA:
In cases where VAT does apply, you must charge the VAT digital tax rate of the country where your customer lives.
💡 For full guidelines on how to handle EU taxes, check out our post on everything you need to know about VAT.
Canada
In Canada, the GST and HST rules nationwide include digital products, and some provinces also have their own local additional tax. There’s a chance your classes could qualify as “intangible personal property or services,” – although online courses specifically are not mentioned on the Canadian tax agency’s website.
Australia and New Zealand
When it comes to online courses, the GST laws in Australia and New Zealand are broad (and pretty vague in comparison to the US or EU). There are no nuances or caveats. The ATO website states that GST applies to “webinars or distance learning courses” — that’s it.
So, GST effectively applies to any kind of course, regardless of whether it’s live or pre-recorded, or whether there’s any human interaction.
Which other countries tax online courses?
Most other countries take the US and EU’s cues when it comes to digital taxes. So you could assume that the same guidelines around elearning products apply elsewhere in the world.
The key is to figure out which other countries tax digital services because online courses will fall under that umbrella.
How Course Creators Can Comply With Tax Laws In 6 Steps
1. Track your sales volume and tax liability
As your business grows, you’ll probably become liable for taxes in new places, and you need to stay on top of this to avoid any trouble with tax authorities such as the IRS. (Fines, fees, and audits, oh my!)
Each tax jurisdiction might have its own tax registration threshold, including separate ones for physical or digital products. In the US, each state has its own economic nexus. When your annual sales pass the tax threshold, you must register and start collecting taxes.
In some cases, the country, state, or city might not have any threshold at all, which means you are liable for taxes from the very first sale. Therefore, it’s crucial that you track the threshold rules and your sales volume wherever you sell online courses.
2. Register for sales tax, VAT, or GST where necessary
Most countries allow online businesses to complete their tax registration through an online portal. In rare cases, you must fill out a form and either email it or send it via post. Visit the local tax agency’s website to find specific instructions.
Once registered, your business will receive a local tax number, as well as a filing frequency for when you must report your tax returns. Common frequencies are monthly, quarterly, and yearly – depending on your income.
3. Verify customers, tax IDs, and locations
Online entrepreneurs must know two things at the point of sale before the payment goes through:
Your tax compliance hinges on this step! Each piece of information helps determine the correct amount of sales tax, VAT, or GST that you’re required to charge and collect from the customer.
Is the customer a fellow business or a private consumer? Is the sale B2B or B2C?
Generally, B2B sales do not need consumption tax added to the transaction. Business purchases can either be tax-exempt, or the reverse-charge mechanism applies. The reverse-charge mechanism requires the buyer to pay the tax directly to the government rather than to you during the sale.
B2C sales, on the other hand, are taxed at the point of purchase.
Can you verify the tax ID?
If the sale is B2B, you must verify the business’ tax identification number. Unfortunately, there’s a fraud problem wherein people provide false IDs to avoid being charged the consumption tax. In places that are cracking down on fraud, such as the EU, it’s your responsibility to verify that these business tax IDs are valid! You can use online tools such as the EU’s VIES and the UK’s VAT number check.
Where is the buyer located?
The customer’s location determines the tax rate you must apply in most scenarios. Many countries require you to collect “customer location evidence” and keep it in your records for years. Location evidence is two non-conflicting pieces of data that prove where the buyer is based. The EU requires you to store it for 10 years digitally!
4. Calculate and collect tax on applicable sales
Perhaps the most obvious step is that you must calculate and collect tax at the point of sale. Apply the local tax rate to the total amount of taxable products, and collect the full payment from your customer.
To check a local tax rate, you can use a free online sales tax calculator. Or a tax compliance automation tool like Quaderno will calculate sales tax, VAT, and GST for you automatically.
☝️Note: In certain countries, such as Australia, you need to include taxes in your product listing, which might affect how you price your online course.
5. Send and save tax-compliant receipts
You must send tax-compliant receipts and invoices after every sale or refund. These documents are for both your customer and your own business records. Plus, tax receipts are necessary if you or your customers want to claim any deductions for the purchase!
Generally, the following information should be on the document:
Some billing and tax compliance software providers offer easy, customizable templates to use for your receipts and invoices.
6. File tax returns and pay when necessary
You must file tax returns everywhere you are registered. Returns are due on a regular basis, and you might owe the country some money. This occurs only when you’ve collected more tax from local customers than you’ve paid on local purchases. Good bookkeeping practices will help you keep these numbers straight, track your business expenses to claim eligible tax deductions.
When should you file tax returns?
Each country has its own filing frequency. The EU requires course creators to file quarterly VAT returns, while in the US, your filing requirements will depend on how much you sell. The more you sell, the more you file. Some places require you to file a return even if you’ve made no sales in that reporting period; this is called a ‘zero return’ or ‘nil return.’
How can you file tax returns?
Some places let you file online through the online portal where you registered. The websites will take you step-by-step through the filing process, and at the end, you’ll learn how much you owe (if anything). Other places might still use hard paper forms. In rare cases, countries require you to hire a local tax representative to file your tax returns.
How The Learnworlds-Quaderno Integration Can Help
The rules we laid out above are only the beginning. More countries and US states are trying to increase eCommerce tax revenue, which means widening the scope of what’s taxable — and casting a wider net to catch online entrepreneurs for the tax liability.
When you’re running a successful online course business, implementing smart tax management is just part of the process. It’s just as important as social media, SEO, and other marketing strategies. In the same way that tools like LearnWorlds can help you create, sell, and market your courses, Quaderno will help you automate your tax compliance steps.
Partnerships like ours are designed to support you and your financial accounting — so that you can spend more time being creative or helping your customers and less time handling your personal finance to take the business you love to the next level!
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Annie Musgrove
Annie Musgrove is a tax researcher at Quaderno, where she writes about global tax policies that affect online businesses.
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