Do I Need to Charge Sales Tax for My Coaching or Business?
The answer to this question depends on where you operate your business, what you sell, and how you sell it. But, the simple answer is that if you are in a personal service business like life coaching, in most cases the answer is no.
Whether or not you are required to collect sales tax depends on:
- Do I have to collect tax (nexus)?
- If you have nexus in a state (you operate business there)
- And/or if you have sales beyond the minimum threshold in a state where you have nexus
- Is the product taxable?
- Depends on if you are selling a product or a service
- If you sell a digital product, does it include contact with the customer
Taxable? Service or Product
Life or health coaching falls under more general categories of services like training, consulting and professional services. These types of services are generally not taxed. However, in some states sales tax is collected on these types services. You can identify which state you have nexus in below and then research if your service is taxed on those states.
However, if you are selling a product, such as a book, that is taxed (even if you sell lit online—more on that later). Again, identify where you have nexus and look into collecting tax for sales of products in those states. Don’t worry though, in most cases your sales numbers are too low to need to collect sales tax. But one day, they may be! (Hopefully!)
Digital Products: If you’re selling a digital product, such as an online course, it may be taxed like a product IF it is pre-recorded, automated, or downloadable. This means that if you offer a “coaching program”, it may not fall under “coaching” it may fall under “digital products”. The question you need to answer is this: does your coaching program include actual coaching with you? If not, it’s a product, not a service, and it is taxable.
Do you present the course or seminar live, in real time? If yes, then it’s not taxed.
Can the participants connect with each other or with you in real time, during the course? Then it’s not taxed.
Does an actual human evaluate the students? Then it’s not taxed. “The participant is evaluated by an instructor. ‘Evaluated by an instructor’ does not include being graded by, scored by, or evaluated by a computer program or an interactive, automated method.”
If your online course is pre-recorded, if there’s no way for the students to interact with you or each other in real-time — then your course is subject to sales ta.. Policies in the rest of the country are likely similar.
Again, this would only be relevant for states which you have nexus and meet the minimum thresholds.
If you determine what you sell is taxable, the next step is to identify whether you have to collect taxes for it. This is called having NEXUS. But first…
Is Sales Tax Charged for Online Sales (of Products)?
The most common question people have about sales tax is whether or not they have to charge sales tax for items that are sold through the internet. The answer is often yes, but only if you have nexus.
First, let’s look at why.
With the ever-increasing prevalence and preference for e-Commerce, it became clear that a change to the sales tax laws was imminent. E-Commerce has become the primary source for individuals and companies to purchases goods and services. Most companies now have some, if not all, of their business generated through e-Commerce, which opened up a much broader customer base, including interstate and international sales. State governments quickly became aware of an ever-growing source of tax revenues that were not being tapped into.
In 2018, the U.S. Supreme Court ruled in favor of the state of South Dakota in South Dakota v. Wayfair, Inc., and its decision to allow the state to enforce tax collection from remote sellers. In reaching this decision, the North Dakota Supreme court overturned its prior decision from 1992 in Quill Corp. v. North Dakota, which required retailers to have a physical presence in the state in order for collection of sales tax to be mandated. This decision stands as a turning point, opening doors to a new era of sales tax and setting off a huge wave of legislation across the country as state governments raced to ride this new public revenue stream.
Today, every state with a sales tax has passed their own Wayfair-inspired sales tax laws. If you are doing business in multiple states, it is important to review the sales tax laws in those states to see if sales tax must be collected for services rendered. Some online sales platforms such as eBay and Poshmark, collect sales tax for the seller. If you are selling your goods and services only through your own website, you will need to be aware of sales tax requirements from the states where you are doing business.
Most US states (45) charge a sales tax for online sales. The Streamlined Sales and Use Tax Agreement (SSUTA) aims to standardize US sales tax policy as much as possible. 24 states have adopted the SSUTA guidelines for online courses and webinars, which are as follows: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.
Sales Tax Nexus: What States Do I Have to Collect Tax In?
When we talked about registering your business with the authorities it was previously explained that if you conduct business, have an office, have an employee, a warehouse, or any kind of physical presence in another state, then you’ll have to register your business as an entity in the state or states in which you have a physical presence. This is called having a physical presence nexus.
If you have nexus in a certain state, you are responsible for collecting sales tax there. If you sell to customers in another state, you do not necessarily need to collect sales tax because you do not have nexus. However, there are other ways you can have nexus in a state, such as making sales to customers who live in other states, beyond a minimum threshold.
We’ll go through different types of nexus below to help you determine what may apply to your business.
1. Physical presence nexus
Wherever your business is physically located, you are expected to register for and collect sales tax. Physical nexus can refer to you as a person, to an employee, an office location, or even a data server you’re using. Just take a few moments to think about how you conduct business to determine if any portion of your business is done in another state. Unless you have an official W-2 employee or another physical location in another state, usually physical nexus only exists in the state where your business resides (which is usually where you live).
2. Economic nexus
Even if you do not have physical nexus in a state, you may be required to collect sales tax for states where you sell a large number of products or digital goods.
If the state does collect sales tax on your type of product AND you meet a certain sales threshold, then you would need to collect sales tax for sales to customers in that state. An example of a common threshold is $100,000 in annual sales or 200 separate sales transactions in that state. If you reach either of these, then your business has nexus and is liable for sales tax there. Exact threshold amounts vary by state and some have much lower thresholds.
If you are having enough sales that you think you may reach threshold in some states, it’s worth looking into it further.
The future of economic nexus: Confirmed by the South Dakota Supreme Court Wayfair decision in 2018, this policy is being implemented in state after state, and it is anticipated that is will eventually become law in every state in the country that collect sales tax. It’s designed to make out-of-state businesses responsible for sales tax on customers who reside in that state. So, as an online business with students or clients located anywhere, you should keep your eye on the economic nexus.
For example, starting July 1, 2021, Florida implemented a law that requires retailers selling more than $100,000 a year online will have to start collecting Florida’s 6% sales tax at the point of sale. This is different than the other types of nexus requirements, which impose other state sales tax on goods and services. This nexus imposes the home state (in this case, Florida) sales tax on goods and services sold to customers in other states.
The following additional forms of nexus are not commonly applicable to coaches or related businesses, but they could be for you. They often have similar thresholds to economic nexus, so if you have high sales make sure you consider if they may apply to your business.
3. Affiliate nexus
You have an “affiliate nexus” if you’re affiliated with a business or individual in the state, and you acquire any students, sales or other forms of business, from this connection. Do you use a referral system for your online courses? If that referral system is located in another state, your business could have would have an “affiliate nexus”.
States that have some version of an affiliate nexus rule are Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine, Missouri, Minnesota, New York, North Carolina, Pennsylvania, and Rhode Island. Many of these states have minimum sales thresholds, so the nexus only applies once you surpass a certain amount of gross sales in a year for your business.
4. Click-through nexus
Similar to affiliate nexus, a click-through nexus exists when your business receives sales through the website of a business located in another state. If you run ads or links on a website that has its primary business location in another state, and that link or ad channels potential students and new business to you, this would be considered a “click-through nexus.” States that have some form of click-through nexus on the books include Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington.
5. Web cookies
These few states consider software or web cookies on devices located in their state, as a business nexus: Massachusetts, Connecticut, Rhode Island, and Ohio. In all cases, the sales thresholds for this nexus are pretty high, meaning you would have to generate a large volume of sales of goods or digital goods in these states in order to be required to pay sales tax on these registrations.
Registering and Collecting Sales Tax
After you’ve determined that you actually have nexus in a state and have a taxable product, the process to start collecting sales tax is surprisingly straightforward. Here are three simple steps for complying with US sales tax for online courses.
- Register for a sales tax permit in that state. You must register for each state’s tax system individually. You should visit the state’s Department of Revenue website You can find a directory on the IRS website. Another option is to register for the SSUTA states at once, using a simple (and free) online application through the Streamlined Sales Tax Registration System (SSTRS). You can pick and choose which of the 24 states are relevant to your business.
- Charge sales tax to customers in that state. If your sales are online through a service like Shopify, for example, there are plugins or apps that are created specifically for this purpose. The amount of sales tax you charge includes the overall state tax rate, plus any county or district taxes that apply. Not every state has local-level taxes, though. Typically, the tax rate levied will be based on where the customer is located. This is called a destination-based tax. Several states have origin-based taxes, meaning you charge tax according to wherever your business is based. The 11 origin-based states are: Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia. California is mixed: City, county and state sales taxes are origin-based, while district sales taxes (supplementary local taxes) are destination-based.
- File sales tax returns in that state. When you register, each state will assign you a filing frequency. It could be once a month, once a quarter, or once a year. Be sure to note your deadlines and pay on time to avoid penalties. Again, check the individual states’ official websites for specific information on how to file.
Do I Need to Collect International Sales Tax?
It is likely that if you are selling services internationally, you have a platform to sell from and international tax requirements will be levied through the web platform. The threshold of sales required to meet international requirements is high and you most likely will not reach those thresholds. Also, for many international sales, there is no way to track or submit payment for sales tax.
If you sell directly from your website and sell a large amount to customers from specific countries, more research about international tax requirements will be needed. You may want to ask an international ecommerce expert, if and when your sales reach the threshold requirements.
As an example, if you read on the website for Udemy, the leading online course marketplace (udemy.com/support), it says clearly that Udemy has a legal obligation to collect applicable transaction taxes including VAT (Value Added Tax), GST (Goods & Services Tax), or other types of sales taxes, for purchases, which may vary depending on a student’s local, state, and country jurisdiction.
Author: Sanda Kruger
Sanda is an entrepreneur, real estate investor, health coach and professional dancer. Sanda is an entrepreneur with more than 20-year experience in business development and project management in the fields of life, health and fitness coaching. She is also a real estate investor and a banker, who learned outstanding adapted business strategies, sales and marketing techniques, communication, and goal setting skills, hands-on, through life and work experiences. She is a certified fitness professional and is the creator of two original fitness programs, called BellyCore® Fitness and AquaCor®.