Is charging customers to take a class over the internet, or to build a custom e-learning course, taxable in Texas?

Plain-English summary

A company that develops and delivers educational courses over the internet asked the Comptroller's tax.help service two questions about its business model.

Charging customers to take a class over the internet: not subject to Texas sales tax. That covers both the class-taking charge itself and a separate charge to write original course content and lesson plans — content creation and internet class delivery are both treated as nontaxable.

Developing a custom course for a specific client (a commissioned course): also not taxable, but with a condition. If the company develops an interactive software program to conduct the class and does not retain any legal rights to that program (i.e., the client owns it outright), the charge is nontaxable. But if the company keeps ownership/rights to the program it built, the transaction becomes a sale of a taxable computer program instead — referencing Comptroller Rule 3.308 on computer hardware, software, and services.

The letter closes with the general geographic rule: Texas sales tax is only due when a taxable item is shipped or delivered to a customer in Texas. If a taxable item (like a computer program the developer keeps rights to and licenses out) is delivered to a customer located outside Texas, no Texas sales tax applies to that transaction.

What this means for you

E-learning and online training companies

Structure client-commissioned course development so the client owns the resulting software outright if you want the development charge treated as nontaxable. If your business model involves licensing the same course software to multiple clients (retaining your own rights), expect that to be treated as a taxable software sale instead.

Companies selling custom software or interactive tools generally

The retained-rights test here mirrors the broader Rule 3.308 framework for custom software development: giving up all rights to a custom build looks like a nontaxable service; keeping rights to license or reuse it looks like a taxable software sale.

Accountants and tax professionals

This letter is a useful, compact statement of the rights-retention test for custom software/course development, plus the basic delivery-location rule (tax applies only when delivered to a Texas customer) — helpful for any company selling digital content or interactive tools to a multi-state customer base.

Common questions

Q: Is charging for an online class taxable in Texas?
A: No — charges for taking a class over the internet, and for writing the original course content, are not subject to Texas sales tax.

Q: Is building a custom e-learning course for a client taxable?
A: Not if the developer gives up all rights to the resulting interactive software program. If the developer retains rights to the program, the transaction becomes a taxable sale of computer software instead.

Q: Does it matter where the customer is located?
A: Yes — Texas sales tax applies only when a taxable item is shipped or delivered to a customer located in Texas; no Texas tax is due on items delivered to out-of-state customers.

Q: Can any e-learning company rely on this letter?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the business it addresses (34 Tex. Admin. Code Rules 3.1, 3.10). Confirm your own rights-retention structure with a tax professional.

Citations and references

Statutes and rules:

• Comptroller Rule 3.308 (computers — hardware, software, services, and sales)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200101017L

Original ruling text

January 24, 2001

To: **

From: Philip Knisely

Subject: Sales Tax for e-learning

Dear **:

Thanks for using tax.help email to inquire about your business and Texas sales
tax.

You stated that your company offers educational courses that your company's
clients can take over the Internet. Your company develops the content for the
courses. You asked the following questions.

1. Should we charge sales tax for the classes?

Response: A charge for taking a class over the Internet is not subject to
Texas sales tax. Additionally, a charge to write original copy (e.g., course
contents and lesson plans) is not subject to Texas sales tax.

2. If a customer commissions us to develop a custom course, would that be
   taxable?

Response: A charge to develop an interactive software program to conduct a
class over the Internet is not taxable provided your company does not retain
any legal rights to the program. If your company retains rights to the
program, your company is selling a taxable computer program. I attached a copy
of Rule 3.308 "Computers--Hardware, Software, Services, and Sales" for your
review.

Texas sales tax is only due when a taxable item is shipped or delivered to a
customer in Texas. No Texas sales tax is due when a taxable item is shipped or
delivered to a customer located outside Texas.

This opinion is based on the facts presented. Additional or different facts
may yield different results.

Please let me know if you have additional questions.

Sincerely,

Philip Knisely