Taxing Online Education

It is not yet law, but the New York State Department of Taxation and Finance issued an opinion earlier this year distance education courses are subject to state sales tax. Some states already impose a sales tax on educational software. The New York opinion discounted the value of the faculty interaction aspect of the educational service provided by a certain distance education provider by the name of SkillSoft. Even though students can only access the learning resources provided by SkillSoft online this opinion in New York states, “constitutes a transfer of possession of the software because the customer gains constructive possession of the software and gains the right to use, or control or direct the use of the software.” So just by having access to educational software, even though such access is part of an educational service that includes mentoring/teaching by an educator, the State of New York believes students should pay sales tax for this distance learning experience.

Of course, these are challenging economic times and state governments are looking for ways to find new sources of revenues, but adding sales tax to online education makes little sense. A tax consultant who is familiar with this case believes there was insufficient human interaction in this online course to justify the purchase of this course as being a non-taxable educational expense. One has to wonder exactly how much interaction between students and teachers is sufficient to deem online education an educational experience or the constructive possession of the software.

When asked for a comment, Michael Lambert of the Distance Education and Learning Council (DETC) indicated his belief that this opinion of the New York State Department of Taxation and Finance will not survive a legal challenge. Still, this is a quite disturbing development. We need to be finding more cost/effective ways to deliver education, not looking for new ways to make it more expensive.

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