Does a distance-learning company have to charge Colorado sales tax on the printed course materials (binders) it ships to students, or is it a nontaxable service?

Plain-English summary

An out-of-state company sells distance-learning programs that help students pass college-equivalent end-of-course exams, mostly in health-care fields. The package bundles a long list of services (academic advising, tutors "as needed," online practice questions and tests, a monitored discussion forum, course-passage guarantees, financing help) plus printed learning materials — three-ring binders for each subject, printed by a third party in another state and shipped to students in Colorado. The company asked whether it owes Colorado sales tax when it provides those materials to students, arguing it is really a service provider and the consumer of the materials.

The Department disagreed. Colorado taxes sales of tangible personal property, but the transfer of property is not taxed when the true object of the transaction is a service and the property is only incidental to it (Special Regulation 40, Service Enterprises). A traditional school is a service — the true object is the teacher's instruction — so course materials handed to students aren't taxed (the school is the consumer). A home-study course is the opposite: there's no instructor presenting the material, so the true object is the books and materials themselves, and they're taxable.

This program fell on the home-study side. No teacher presents the curriculum; tutors are only "as needed"; the discussion forum is mostly student-to-student with the company merely "monitoring." Although the online questions and tests add real value, the Department reasoned that the materials are the core — a customer might forgo the practice tests for a lower price, but wouldn't forgo the reading materials. So the true object is the materials, and the transfer is taxable.

What this means for you

Distance-learning and continuing-education sellers

If your program is built around materials people work through on their own — even with online quizzes and optional tutoring bolted on — Colorado is likely to treat the materials as the taxable true object, not as incidental to a service. The presence of "services" in the package doesn't make it a service sale unless instruction genuinely predominates, the way a teacher in a classroom does.

How to charge and source the tax

The Department told the company to separately state the price for the materials and collect Colorado sales or use tax, computed on the materials' fair market value — not merely the company's printing cost. Because the company is reselling the binders, it should give the out-of-state printer its Colorado retailer's sales tax license to buy them exempt from that state's tax — and it cannot claim a Colorado credit for any sales tax it paid to the other state on those materials.

Where instruction does predominate

Live seminars and lectures flip the analysis: when materials are handed out as part of a seminar, the Department generally treats the sponsor as providing a service (and the sponsor as retailer) unless the sponsor separately states a charge for the material. The line is whether a person actually presents the material to the learner.

Common questions

Q: Are course materials always taxable in Colorado?
A: No. If the true object is instruction by a teacher (a traditional school), the materials ride along untaxed and the school is the consumer. If the true object is the materials themselves (a home-study course), they're taxable.

Q: We provide tutors and online support — doesn't that make us a service?
A: Not necessarily. Here tutors were only "as needed" and the forum was mostly student-run, so the Department found the materials predominated. It's a facts-and-circumstances test of what the customer is really paying for.

Q: On what amount do we collect tax — our printing cost?
A: On the materials' fair market value, not just your cost of production. Separately state that price on the invoice.

Q: Can we rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department, and the Executive Director did not formally review it. A company with these facts could request a binding private letter ruling.

Citations and references

Statutes and regulations:
- § 39-26-104(1)(a), C.R.S. — imposition of Colorado sales tax on retail sales
- § 39-26-204, C.R.S. — imposition of use tax
- Department Special Regulation 40 (Service Enterprises) — true-object test; seller is the consumer when property is incidental to a service

Out-of-state authority the Department cited as in accord:
- Florida Technical Assistance Advisement 07A-037 (10/25/2007)
- New York Advisory Opinion TSB-A-96(76)S (12/13/1996)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-08-010.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2008-10

XXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
February 28, 2008

Re: taxability of school material
Dear XXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated December 20,
2007, re: the taxability of educational materials.
Issues
Does the company incur sales tax liability when it provides educational material to students?
Background
You provide the following background. Your client is an out-of-state company that provides distance
educational learning and tutorial services to help its customers pass college equivalent end-of-course
exams in several professional fields, primarily health care. These services include:
• Educational program assessment
• College transcript analysis
• Course evaluation
• Academic advising
• Academic support
• Course passage guarantees
• Tutors, as needed
• Membership in distance learning association
• On-line practice questions
• On-line practice tests
• On-line discussion forum (monitored by the company), which facilitates on-line study groups
• Welcome and guidance calls to encourage customers and help them with study plans, time
management, study tips, contract questions, and school-related questions
• Guaranteed financing through third-party loans
• Subject matter updates

•
•
•

Program design and time management tools
Enrollment assistance services for affiliated colleges and universities
Customers have unlimited access to program advisors, academic advisors, and customer
service representatives.

In addition to these services, the company also provides customers with learning materials (i.e., 3ring binders) for each subject. The company pays a third-party printer, which is located in [State], to
print the material. The company ships the material by common carrier to customers located in
Colorado. The company pays [State] sales tax to the printer on its cost to print the learning material.
Customers are charged a single fee for each subject (e.g., biology, mathematics, etc.)
Most customers obtain financing through credit unions to pay for the tuition. If the customer defaults
on the loan, the company will pay the credit union and the customer loses access to the abovereferenced materials.
It is the company’s understanding that no Colorado sales tax is due on course materials transferred
to customers because the company is primarily providing a service provider and it is the consumer of
the materials, not the customers.
Discussion
Colorado imposes sales and use tax on the sale, use, storage, or consumption of tangible personal
property. §39-26-104(1)(a) and 204, C.R.S. However, the transfer of tangible personal property is
not taxed if the true object of the transaction is a service and the transfer of property is only incidental
to the service. In such cases, the seller is deemed the consumer of the property. See, Department
Special Regulation 40 (Service Enterprises).
Traditional schools are generally considered service providers because the true object of the
transaction is the instructional service provided by the teacher. The transfer of course materials from
the school to the student is not taxable if the school does not separately charge for the material. The
school is considered the consumer of the materials. Therefore, the sales of these material by the
supplier to the school is taxable, unless the school is exempt (purchases by public schools are
exempt).
In contrast, instructional materials provided for a home study course are generally taxable because
the true object of the transaction are the books and materials themselves and the seller does not
provide instructional services. A common example of such home study programs are professional
continuing educational programs. The seller of these home study programs provides books, audio,
and other material which the customer reviews at his or her own pace. There is no instructor that
presents the material to the consumer. The materials are subject to sales and use tax. However,
when these materials are offered as part of a seminar or lecture, the department will generally view
this as a service transaction, and the program sponsor as the retailer, unless the sponsor separately
states a charge for the material.
You present a scenario that is neither a traditional school setting nor a purely home study program.
However, it is difficult to determine to what extent services are provided in the scenario you provide.
Clearly, teachers do not present the company’s curriculum. Although tutors are available, they are
not the principal means by which customer learn the material. Instead, customers review the material
much like a home study course. Moreover, tutors are provided only “as needed” and the frequency
and magnitude of this tutor service is not disclosed. Group discussions appear to involve primarily
customers, and the company’s involvement is characterized simply as “monitoring.” There are some
adjunct services, such as transcript review, educational program assessment, and similar services,
but these do not represent the core of the company’s business. On-line practice questions and online practice tests are services.

Although there are a number of services listed, the core of the program and the principal source of
learning appear to be the home study materials. Certainly, the on-line questions and testing are
significant services, but it would appear that they supplement the reading material. In other words, a
customer may be willing to acquire the materials and forego the practice questions and testing for a
reduced price, but it is unlikely that the customer would be willing to enter a transaction in which he or
she foregoes the reading material in lieu of the practice questions and tests. This is not say,
however, that these services are not without value. On the contrary, I assume these other services
provide real and significant value and customers are willing to pay a premium to acquire them.
Nevertheless, on balance, I find that the scenario presented here is more akin to a home study
course. Although services are provided, these do not predominate as in a traditional teacher /
student setting. For these reasons, I conclude that the true object of the transaction you describe is
not a service, and the transfer of material to the customer is a taxable transaction. I note that other
states have reached similar conclusions. See, e.g., Florida Technical Assistance Advisement 07A037, 10/25/2007; New York Advisory Opinion TSB-A-96(76)S, 12/13/1996.
The company should separately state the price for the materials and collect from customers sales or
use tax. The tax should reflect the fair market value of the material and not simply the company’s
costs of production. The company should present to the North Carolina printer the company’s
Colorado retailer’s sales tax license for purpose of acquiring the material exempt from North
Carolina’s sales tax. The company cannot claim a credit for any sales tax paid to North Carolina for
the materials.
Finally, the Department makes a good faith effort to provide accurate and complete answers to
questions posed to it by taxpayers. However, the information and answers provided here are not
binding on the Colorado Department of Revenue, nor do they replace, alter, or supersede Colorado
law and regulations. The Executive Director, who by statute is the only person having authority to
bind the Department, has not formally reviewed and/or approved this response.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue