When Is Distance Learning Subject To Taxation? It depends.
Just like the many employees who have been forced to adapt to remote working, students across the nation have transitioned to distance learning as a result of the pandemic. While universities have previously offered online options for a minority of classes, the pandemic has rapidly pushed the majority of instruction online.
As is the case for companies with remote workforces, universities may now be facing changed and possibly increased tax obligations. However, rules on the taxation of online schooling vary wildly by state, and if students are now located in a different state than their school because of displacement by the pandemic, it gets even more complicated.
The 2018 Wayfair decision paved the way for states to implement economic nexus legislation. Today, over 40 states have implemented some form of economic nexus. In a nutshell, this allows states to require remote sellers to collect and remit sales taxes based on the seller's economic presence alone, typically measured by way of sales thresholds or the number of sales transactions made per year.
For universities, online education and other training courses offered by these institutions may or may not fall under the purview of economic nexus, depending on the state.
In the time of COVID-19, universities may now be offering instruction in states they have not previously, or the number of students enrolled in these classes may have increased to the point of triggering economic nexus. However, the next point of contention is whether distance learning is even taxable in those specific states.
Unfortunately for universities, it will not be a single answer across the board.
Regardless of economic nexus, online classes being taught to in-state students may or may not be taxable, again depending on the state as well as the type of class.
In Tennessee, for example, live, instructor-led online courses are not subject to Tennessee sales and use tax, but self-paced online classes with no live instruction components are taxable.
This is an example of how removing even one element from the distance learning equation (in this case, live instruction) can change the definition of those courses from a service to a digital good, which often also changes its taxability.
Another determinant of taxability is the type of school or program that is offering the online instruction.
There are generally two categories that schools will fall into: government/non-profit institutions or for-profit/private institutions. Typically, the education tax exceptions that government/non-profit institutions enjoy are not available to for-profit/private institutions. So, when it comes to distance learning, for-profit and private institutions are more likely to face tax obligations due to online instruction.
You might now be wondering why this matters to anyone outside of universities or other learning institutions.
Beyond the potential changes to tax legislation as a result of the new tax burdens faced by universities, it also matters because companies that are providing the technology needed to facilitate distance learning (whether in a single sale format or SaaS) may also face increased tax ramifications.
In these instances, the impact of economic nexus and determining whether the courses will be considered taxable matters just as much to the company facilitating the distance learning as it does to the university offering the courses.
If you have questions regarding tax liability brought about by the sale of software to universities or other learning institutions, or any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Mississippi
This month we travel to the land of Dixie, the southern state of Mississippi. The state is the 32nd largest and 34th most populous of the 50 states. The state is heavily forested with over half of the state’s area covered by wild trees including mostly pine, as well as cottonwood, elm, hickory, oak, pecan, sweetgum and tupelo.
How Will the Pandemic Impact Sales Taxes In The Long Run?
As states across the nation continue to struggle with immediate concerns related to the pandemic, lawmakers are turning their sights to the future and looking for ways to make up the massive budget shortfalls brought on by COVID-19.
One potential avenue is sales tax. There are a variety of ways that legislators could change or implement sales taxes to increase revenue. In the following article, we’ll examine these and other long-term changes that we may see over the coming months and years as a result of the pandemic.
Economic Nexus Legislation
For a breakdown of economic nexus and the impact it has had over the last two years, please click here.
An ongoing theme of the pandemic has found states with robust economic nexus legislation faring (at least slightly) better than those without. While over 40 states have now enacted economic nexus laws, there are still two states with a general sales tax that have yet to do so: Florida and Missouri.
We’ve previously discussed our thoughts on whether COVID-19 may finally be the push these states need to enact economic nexus legislation, but states that have already done so may soon also be making changes.
Tennessee and North Carolina have led the charge, both reducing or removing the sales threshold that triggers economic nexus in their states earlier this year. As we previously acknowledged, these changes may have already been in the pipeline, but the rush to introduce, and then pass these laws, no doubt came as a result of the pandemic.
We expect to see similar changes from other states during legislative sessions in 2021.
Increased Taxation Of Digital Goods And Services
While the taxation of digital goods and services has been steadily growing over the last decade, the pandemic will likely trigger increased expansion, and at a much faster rate.
A number of states are already taxing goods like electronically downloaded software or streaming services like Netflix and Hulu, but of those states that have yet to tax digital goods or have limited taxation, a handful have already introduced legislation to change that.
Maryland is one such example. While the General Assembly did pass H.B. 732 in March 2020, which would create a new tax on digital advertising revenue, Gov. Larry Hogan vetoed the bill in May. However, his veto could be overridden in 2021 by the General Assembly.
Moving forward, as the digital economy continues to grow and the effects of the pandemic add up, we expect more states to expand existing digital goods and services taxes, or introduce new taxes if they don’t already exist.
Other Tax Avenues
In addition to taxes on digital goods and services, as well as the potential changes to economic nexus legislation, some states are turning to entirely new tax avenues for revenue.
Arizona, Montana, New Jersey and South Dakota looking to legalize and tax recreational marijuana, while Maryland lawmakers are looking to increase excise taxes on alcohol to raise revenue for healthcare spending.
We expect to see other states follow suit and expand taxation to make up for COVID-related budget shortfalls as we move into 2021 and beyond.
Do You Need Help With Your Online Sales Tax Compliance?
If you have questions about your tax liability from online sales or any other state sales tax compliance questions, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
California's Partial Manufacturing and R&D Exemption
The California Manufacturing Partial Sales and Use Tax Exemption allows manufacturers and certain research and developers to exempt a portion of sales and use tax. In general, this partial exemption allows a qualified person, who purchases qualified tangible personal property and used that property in a qualifying manner, to purchase the property at a reduced tax rate, according to the CDTFA. While it’s been around for a few years, in 2017, California amended the exemption to expand the partial sales and use tax exemption for purchases of certain tangible personal property used in manufacturing or research and development activities.
What You Need To Know About Long-Term Impacts of the Pandemic On Online Retailers
In the last 10 months, much of daily life has been turned upside down. Large events have been canceled, schools have switched to distance learning and many workplaces are still depending on remote setups for employees.
One of the many other consequences of the pandemic is the temporary closure of in-person retailers. Between this and understandable safety concerns, many consumers have turned to online shopping as their default.
This has offered many retailers the lifeline they needed to stay afloat during the pandemic, but it’s also creating problems for those that were unprepared for the complex tax burdens associated with online retail.
A Crash Course On Economic Nexus
Seasoned online retailers and frequenters of this blog are likely quite familiar with economic nexus, but small business owners who have just started to dip their toes in because of the pandemic can easily be caught unaware. Even retailers who previously sold online and are familiar with the concept may have found themselves caught off guard by the increased tax burden when online sales took off earlier this year.
So, what is economic nexus?
In short, states that have passed economic nexus legislation (more than 40 as of this writing) can require out-of-state retailers to collect and remit online sales taxes even if they have no physical presence within the state. Economic nexus is generally triggered through sales or transaction thresholds (which vary by state) and can be as little as 200 transactions and/or $100,000 in sales.
After the 2018 Wayfair v. South Dakota ruling, many states rushed to put economic nexus in place. Many have also implemented marketplace facilitator legislation, which shifts the burden of collecting and remitting sales taxes from the seller (who might be a small business) to marketplace facilitators (like Amazon or eBay).
How Is Economic Nexus Related To The Pandemic?
Several months ago, we shared an article discussing how COVID-19 is affecting economic nexus and other related legislation. While many states initially relaxed enforcement on tax collection, those states are now looking for additional revenue sources and ways to reduce fiscal shortfalls.
A handful of states have already lowered sales thresholds within the last year or made other changes to economic nexus or marketplace facilitator legislation. While some of these changes were already in the works before the pandemic hit, many were rushed through the legislative process as a result.
Tax professionals expect even more changes as we head into the 2021 legislative session. While the 2020 sessions were largely tied up with health and wellness concerns, there will be ample opportunity in the coming year for Wayfair-related legislative changes.
What Should Small Online Retailers Do?
The economic impact of the pandemic will be far reaching, and regardless of how well individual states weather the storm, small online retailers should expect that the thresholds may continue to lower, and states will become even more aggressive when it comes to tax compliance. Also, we expect audit enforcement to pick up as well, as states try to fill the deficit gap.
The best way for small business owners to protect themselves is to be proactive about fully understanding nexus concepts (yes, we can help with that too!) and preparing themselves for multi-state sales tax compliance. Don’t wait until a state comes knocking to check whether you’re triggering economic nexus. Likewise, make sure you’re up to date on marketplace facilitator laws in your state and how they might affect your online business. Hint – while these laws were supposed to make it easier for small businesses, there are still likely filing ramifications and the rules can be confusing.
To learn more about marketplace facilitation, follow this link for a previous blog we did on the subject.
Do You Want Help With Your Online Sales Tax Compliance?
If you have questions about your tax liability from online sales or any other state sales tax compliance questions, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
Focus on New Mexico
New Mexico, nicknamed as “The Land of Enchantment,” is located in the Southwest part of the United States. The state was admitted to the union as the 47th state on January 6, 1912. It is one of the mountain states and shares the Four corners region with Utah, Colorado, and Arizona.
The dramatic climate, a sharp diversity of people, and famous landscapes are some of the things that make New Mexico a unique state. The state’s climate is generally semiarid to arid, though portions of the state have a continental and alpine climate, and its terrain is mostly covered by mountains, high plains and desert. The state is home to prospering art communities, colleges, and historic sites that inspired many influential early artists.
How Colorado Is Easing The Tax Burden For Retailers
Over the last two years, retailers across the U.S. have needed to adjust to the widespread implementation of economic nexus. As of today, only two states with a general sales tax have yet to implement it. However, a handful of states add an additional layer of complexity. These states, known as home rule states, create a tax burden that can be overwhelming. Colorado is included in this number.
However, much to the relief of retailers, Colorado is now looking to simplify local sales tax collection for remote sellers within the state.
What Makes Colorado So Complex?
A home rule state gives local government entities, including municipalities and counties, the authority to establish and levy their own sales taxes, separate from state sales tax regulations. Much like economic nexus laws, tax regulations vary wildly between home rule jurisdictions, even within the same state.
What this means, is that an out-of-state retailer who makes sales into Colorado will need to individually contact each local tax authority to determine whether they are obligated to collect and remit sales tax on their products, and what rate they will need to collect at. Then, they must file a separate return with each tax authority.
It can be a horrific situation for smaller retailers that trigger economic nexus within Colorado but do not have large accounting departments.
What Is Colorado Doing To Reduce The Burden?
In 2017, lawmakers in Colorado established the Sales and Use Tax Simplification Task Force. As a group, they study “sales and use tax simplification between the state and local governments, including home rule municipalities … to adopt innovative revenue-neutral solutions that do not require constitutional amendments or voter approval.”
Two solutions have emerged as a result. The first, the Sales & Use Tax System (SUTS), a statewide portal for tax collection implemented by the Department of Revenue (DOR), launched earlier this year. So far, 28 percent of home rule jurisdictions have started the process of securing signatures for the agreement, and 38 percent of the jurisdictions have signed the agreement and are currently onboarding. An additional 32 percent are currently reviewing and evaluating the system, while the final 1 percent have delayed reviewing until they are fully staffed.
The second solution, a model ordinance for home rule municipalities developed by the Colorado Municipal League and the DOR, was created in early 2020. Home rule municipalities that have joined SUTS are also encouraged to adopt the model ordinance. On the flip side, those municipalities that do not join SUTS are asked not to adopt the language on economic nexus and move forward with voluntary compliance. This is because, “The risk of a lawsuit under the United States Commerce Clause if you were to enforce economic nexus without the single point of remittance is high.”
A number of municipalities, including Silverthorne, Pueblo, Carbondale and Gunnison have already adopted the model ordinance.
These two solutions working in tandem should simplify sales tax compliance for remote sellers to a reasonable degree, especially as municipalities continue to adopt them.
Do You Have Questions About Taxation in Colorado?
If you have questions about your tax liability in Colorado, or any other state, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
State Tax Issues Associated with Troubled Companies: Part Two- Sales and Use Taxes
Sales taxes are often overlooked when a company is experiencing an economic crisis. Given that some jurisdictions can have rates over 10%, this can be very costly at a time when a company can least afford this expense. With the exception of bankruptcy situations, there are no “special” rules with regard to sales or use taxes when a company is experiencing financial difficulties. So, how can a troubled company minimize their sales and use tax obligations?
State Tax Issues Associated with Troubled Companies: Part 1- Corporate State Income Tax Issues Associated with Cancellation of Debt Income
As we hear about the increase in bankruptcies and debt restructuring, corporations often assume that the state income tax treatment will mirror that of the Internal Revenue Service. This is far from the truth in many states. In our experience, the state tax consequences are often thought of at the last minute or ignored entirely. In fact, it is not unusual for these issues to be addressed during the preparation of the state income tax returns and are rarely analyzed in depth. We’d rather see our clients be proactive!
Cancellation of Debt
Income from the cancellation of debt (COD) can be excluded from federal income. This is dependent on the level of insolvency. If a corporation has excluded COD income, they are required to reduce tax attributes (net operating losses, credits, capital loss carryovers, basis of property, passive activity loss and credits carryovers and foreign tax credits). Federal rules dictate an ordering of the attribute reduction unless certain elections are made. To the degree you are able to consider the state consequences prior to the execution of any debt restructuring, a corporation may be able to preserve state income tax attributes. Further, in some instances, a state income tax gain could be inadvertently generated, causing a tax liability for state purposes even when none was generated for federal tax purposes.
The Trouble With Home Rule Jurisdictions
Over the past two years following the 2018 Wayfair decision, which has allowed more than 40 states to implement economic nexus legislation, we’ve seen these laws affect retailers in sometimes unexpected ways.
Take, for example, home rule jurisdictions. In a post-Wayfair world, the tax burden they create can come as a rude awakening for retailers and legislators alike.
In an already complex online sales tax environment, where every state has its own economic nexus thresholds and requirements, home rule jurisdictions add yet another layer of complication.
What Is Home Rule Jurisdiction?
In this context, “home rule” refers to local governments, including cities and counties, that are given the authority to establish and levy their own sales taxes, separate from state sales tax regulations.
A handful of states, including Alabama, Alaska, Arizona, Colorado and Louisiana, allow self-administering local tax authorities. Much like economic nexus laws, tax regulations vary wildly between home rule jurisdictions, even within the same state.
What Does This Mean For Retailers?
Ever since the Wayfair decision, retailers have been scrambling to properly comply with economic nexus legislation and correctly collect and remit online sales taxes. For smaller companies that trigger economic nexus through sales thresholds (which also vary depending on the state) but don’t have extensive accounting departments, this new tax burden is daunting.
While there has been progress made to simplify and streamline economic nexus across the country, the regulations remain a drain on resources for many smaller businesses.
As stated above, home rule jurisdictions add an additional level of complexity. The complication comes from three main sources: the regulations themselves, the need to submit separate returns for each jurisdiction and the fact that each jurisdiction can choose to audit the seller.
What States Are Doing To Ease The Tax Burden
To the relief of many retailers, a number of states are taking the burden these home rule jurisdictions create seriously and have regulations to simplify the process.
In Alabama, remote sellers can apply for a Simplified Sellers Use Tax, which allows them to collect, remit and report at a flat 8 percent for all sales into the state. The Louisiana Department of Revenue has a similar program, offering a Direct Marketer Sales Tax Return, with a flat combined rate of 8.45 percent.
In Alaska, the Alaska Intergovernmental Remote Seller Sales Tax Agreement, created by local governments and facilitated by the Alaska Municipal League, serves as a central organization for seller registration, return collection, tax fund distribution and audits.
As the online sales tax environment continues to evolve post-Wayfair, we expect to see additional refinements to economic nexus legislation and home rule regulations from states to make the process easier for both retailers and state agencies.
Do You Have Questions About Home Rule Jurisdictions?
If you have questions about economic nexus or home rule jurisdictions please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
