Revenue from online education is creating new sales tax obligations for higher ed institutions, but the rules vary widely by state.
Many higher ed institutions have been battling budget woes in recent years due to decreased funding and dwindling enrollments, which has prompted some to diversify their revenue streams. Amid ongoing struggles, the COVID-19 pandemic has had a further negative impact on public and private institutions alike. As a result, many institutions are expanding into new digital channels to reach students based in other areas to lift enrollment numbers and increase revenues.
Still, expanding online isn’t as clear cut as it may sound at first. Colleges are finding creative ways to provide virtual classes that span from continuing education to professional development, and some are even going beyond the traditional bounds of higher education. As colleges and universities expand their online footprint and wander into new non-traditional education services, it’s likely that they will encounter new sales tax obligations that they would otherwise not face while solely operating in-person courses.
Remote sales tax: What does it mean for education?
In June 2018, the Supreme Court decision in South Dakota v. Wayfair, Inc. made it possible for states to tax the transactions created by remote sellers regardless of the seller’s physical presence in the state in the form of economic nexus laws. Today, economic nexus laws exist in 43 states, the District of Columbia, and parts of Alaska (where there are local sales taxes but no statewide sales tax). What many don’t fully understand is that state and local governments tax many different types of services. So, not only do economic nexus laws apply to businesses selling goods into other states, but they could also apply to the sale of online education to students in other states.