Colorado: Online Courses Taxable Under True Object Test

The Colorado Department of Revenue recently issued a private letter ruling addressing whether that taxpayer’s revenue from charges for access to an online learning platform, as well as revenue from internet advertising services, were subject to state and state-administered sales and use tax. The taxpayer operated an online learning platform that sold six different learning plans with various features. All the plans provided on-demand digital courses with streaming video lessons, transcripts of the video lessons, and access to online “tutors.” Customers could submit questions on the platform and would receive the tutor’s answer as well as an automated list of similar questions and answers (when available, the answers included links to other related pre-recorded video lessons). The taxpayer also earned advertising revenue under a pay-per-click model and by fulfilling insertion orders.

Under Colorado law, sales and use tax is imposed on sales of tangible personal property and certain enumerated services. When classifying transactions that involve elements of services, intangibles, and tangible personal property, Colorado employs the “true object” test. The true object test looks to the totality of the circumstances to characterize transactions involving the provision of both tangible personal property and intangible property or services. The method of delivery of a product is not a factor in determining the taxability. Examples of methods used to deliver tangible personal property under current technology include, but are not limited to, compact disc, electronic download, and internet streaming. Applying the “true object” test, the Department determined that the taxpayer’s customers gained access to the learning plans as essentially finished products that provided a streaming video lesson and a written transcript of that lesson. While the subscription plans also provided services, those services existed to support the customer’s use of the platform and direct consumers to existing videos and lessons. In the Department’s view, taken as a whole, the learning plan products were more analogous to the sale of tangible personal property and were subject to state and state-administered sales and use tax. Lastly, the Department determined that the taxpayer’s advertising services, like most services in Colorado, were generally not subject to sales and use tax. For questions on PLR 21-005 please contact Steve Metz.