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RULING NO. 2022-2

SALES AND USE TAX
DIGITAL GOODS
TRAINING SERVICES

FACTS:

The Company offers an online learning platform (the “Platform”) that serves the educational needs of students through a virtual learning environment of on-demand digital courses.  The courses offer streaming video lessons to teach academic subjects, professional topics, and vocational licensure preparation courses.  The courses are each accompanied by a written transcript of the audio from the streamed lessons.

Students may access the Platform and its courses from desktop computers or mobile devices. The courses are not downloadable, although the mobile device version of the Platform provides temporary caching of the course for several days to allow access to it at times when the student’s internet access has been interrupted. In such cases, when the student’s mobile device regains internet access, the Platform confirms the student’s subscriber status and updates the student’s course progress on the Company’s servers.

Students who access the Platform from their mobile device must first download the Company’s mobile app to their device. The Company does not charge students for the app, which is available from the Apple and Android stores. The app enables and controls time-limited caching of mobile version files for temporary offline viewing and use of interactive quizzes. Temporarily cached files on a student’s mobile device “time-out” after five days; permanent possession of mobile-version file downloads is not possible.

Each subscription to a course on the Platform includes access to live online tutors, as well as providing an automated list of questions with answers, in some cases including a brief video with interactive questions to help a student to practice the lesson. Each subscription plan offers a set number of tutoring interactions per subscription period. Parents can obtain a free “parent account” that enables them to monitor their child’s progress and receive regular email updates.

The Company offers the following products on its Platform:

Learning Plan A - College Courses for Credit:  This learning plan, meant for college and college-bound students, includes interactive chapter quizzes to assess the student’s understanding of the instruction provided. Learning Plan A includes two online proctored exams per month, which are recommended for transferable credit by the American Council on Education and the National College Credit Recommendation Service. A student’s grades for courses recommended for transferable credit are based on a combination of graded homework assignments, quizzes, and a proctored final exam.  Homework assignments are graded by online tutors who interact with students to explain the grading.  This learning plan allows students to seek advice from online guidance counselors who advise them about choosing a college and choosing course selections on the Platform. This learning plan includes up to ten live tutoring interactions per subscription period.  The Company retains copies of each student’s transcripts indefinitely, which can be submitted to a learning institution at the student’s request.

Learning Plan B – College Courses for Credit for “Sponsored Students”: This is a program offered to enterprises, municipalities, and other organizations that sponsor their employees (“Sponsored Students”) to earn a college degree from a partnering college.  Each Sponsored Student must be accepted into this program by submitting an application, passing the Company’s background check, and passing one college-level course on the Platform to confirm that the Sponsored Student has met the program’s application criteria. A Sponsored Student who has been accepted into the program gains access to the features of Learning Plan A, and under the guidance of an assigned live “success coach,” commences the course of study designated for the partnering college to ultimately receive a college degree. Learning Plan B is designed for Sponsored Students to address their general education course requirements via the Platform.  Once a Sponsored Student has completed the required courses in Learning Plan B, the Company provides assistance with their transfer-application to the partnering college.

Learning Plan C – Courses with Assessments and Access to a Live Tutor:  This learning plan provides access to the digital courses, including interactive chapter quizzes.  Students can earn a certificate of completion for each course for which they pass the quizzes, which they can download from the Platform.  The Platform retains a permanent record of each student’s certificates of completion.  Learning Plan C also includes up to ten live tutoring interactions per month.

Learning Plan D – Teacher Plan: This learning plan includes the features of Learning Plan C, plus additional capabilities to enable teachers to integrate the Platform’s digital courses into their curriculums.  Learning Plan D may be subscribed to by educational institutions on behalf of their teachers, or by teachers as individuals. Subscribers can provide their students with access to the courses, remotely assign courses and lessons, and display the courses in their classrooms. Subscribers can customize the digital lessons by inserting their own slides with the teacher’s material into the lessons.  This learning plan provides subscribers with additional web-based resources, such as lesson plans, automated grading of quizzes, progress tracking, and access to group learning activities for their classrooms. In addition, this learning plan allows subscribed teachers to enroll in any class offered on the Platform, with access to live online instructors, to help teachers to pass and maintain their professional certifications.

Learning Plan E – Courses with Access to Live Tutor:  This learning plan provides access to the Platform’s courses, but does not include quizzes and does not assess the students on passing the course.  It includes up to five live tutoring sessions per month.

Learning Plan F – Tutor Access Plan: This learning plan provides access to brief video lessons and interactive questions that are related to a student’s question, to help the student practice the lesson. It allows up to five live tutoring interactions per subscription period, with the ability to purchase additional interactions.

ISSUES:

Are the learning plans that the Company offers on its Platform subject to sales and use taxes as the sale of digital goods?

If the learning plans are not taxable as digital goods, are they subject to sales and use taxes as a service enumerated in Conn. Gen. Stat. § 12-407(a)?

RULINGS:

The learning plans that the Company offers on its Platform are not generally subject to sales and use taxes as digital goods because their true object is a nontaxable service that is related to education or training.  However, depending on the circumstances, the learning plans may be taxable as either job-related training under Conn. Gen. Stat. § 12-407(a)(37)(J), or as computer training or software training under Conn. Gen. Stat. § 12-407(a)(37)(A).

DISCUSSION:

Connecticut generally imposes sales tax on retail sales of tangible personal property.  Digital goods are included within the definition of “tangible personal property.”  Conn. Gen. Stat. § 12-407(a)(13).  “Digital goods” are defined as audio works, visual works, audio-visual works, reading materials, or ring tones, that are electronically accessed or transferred. Conn. Gen. Stat. § 12-407(a)(43).  Given the information provided by the Company regarding its learning plans, it is possible that they may fall within the definition of “digital goods.”

In addition to taxing sales of tangible personal property, Connecticut taxes services that are enumerated in Conn. Gen. Stat. § 12-407(a)(37).  Upon review of the descriptions provided by the Company of its learning plans, it appears that the plans have indicia of certain of the enumerated services. Given that the learning plans may be taxable as either a sale of a digital good or an enumerated service, as explained more fully below, the Department must determine the true object of the transaction, with respect to the questions of whether they are taxable as digital goods or as an enumerated service, or are neither and are not subject to sales and use taxes.  See Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 251, 558 A.2d 993 (1989).

Whether the Taxpayer’s learning plans are taxable as digital goods requires a determination of the true object of the transaction between the Taxpayer and the students who use such plans; specifically, whether the true object of that transaction is to provide students with a digital good in the form of an electronically accessed or transferred audio-visual product, or whether the true object is to provide students the opportunity to access the learning plan’s educational or training offerings.

A review of what the learning plans provide to students makes it clear that they are not choosing to purchase the plans simply for the ability to watch an electronically accessed or transferred audio-visual production, such as would be the case if they merely sought to purchase a digital good. Instead, the learning plans offer students access to a live tutor and practice quizzes, and several plans allow students to gain credit toward academic, vocational or professional accreditations. While the audio-visual works are an important component of the Company’s learning plans, the true object for the students in taking the courses on the Platform is the education or training they offer, and not the sale of a digital good.

Because services that are related to education or training are generally not subject to sales and use taxes, the Company’s learning plans are not taxable, with the two exceptions discussed below.

There are two services enumerated in Conn. Gen. Stat. § 12-407(a)(37) that may apply to the Company’s learning plans, depending on the circumstances.

The first taxable service that may apply to the Company’s learning plans is job-related training, which is included under business management consulting services that are enumerated as taxable services in Conn. Gen. Stat. § 12-407(a)(37)(J). “Business management consulting services” include furnishing advice and assistance on the management of a service recipient’s core business activities or human resource management activities. Job-related training is included among the business management consulting services that pertain to human resources management activities. Conn. Agencies Regs. § 12-407(2)(i)(J)-1(f) and (i)(1). Training services are taxable at 6.35% when a service provider is engaged and paid by an employer to provide job-related training to personnel whose primary work place is in Connecticut.  General education seminars, such as refresher courses, courses on current developments in a particular field, and courses for continuing education credits are not subject to tax as job-related training services. See Policy Statement 2000(4), Sales and Use Taxes on Charges for Personnel Training Services. Thus, to the extent that the Company’s learning plans are “job-related training” as described above, they are taxable under Conn. Gen. Stat. § 12-407(a)(37)(J) as business management consulting services.

The second taxable service that may apply to the Company’s learning plans is computer training and software training, with the rate of tax depending on whether it is job-related training as described above.  If a learning plan offers computer training or software training that is job-related, it is taxable at 6.35% under Conn. Gen. Stat. § 12-407(a)(37)(J). If, however, a learning plan offers computer training or software training that is not job-related, the learning plan is providing a computer and data processing service that is taxable at the 1% rate, whether or not such training is rendered in connection with the sale or lease of software. See Policy Statement 2006(8), Sales and Use Tax on Computer-Related Services and Sales of Tangible Personal Property.                                                                                  

LITIGATION DIVISION
April 21, 2022