Web Based Training / Tutorials / ASG Rules

Company creates digital media for distriubtion on websites. Custoemrs pay a subscription to watch a tutorial on line regarding how to do a particular task.  Let's say for example it was cooking.

Does that sound like it would be a service business?

Is  capital a material income-producing factor?

That's just it, it is not, I don;t think.  Probably a simple video camera (not a big fancy production studio with $50,000 high def video cameras). The value is derived from the instructors "performance."  But it just seems hard to rationalize that this would be a service business in the way an accounting firm would be.  

For what it's worth, the 414(m) proposed reg lists "performing arts" as a business that is automatically a service organization.

I agree capital is probably not a material income-producing factor. She makes her income off of how many subscriptions she sells, which has nothing to do with the capital investment, for example, how many ingredients she had to purchase to make a given video.

Her customers are paying for her, not the thing she produces, and to my mind that is the main difference between a service organization and not. You can argue that she produces videos and sells them, so she's selling a product and not a service, but that's like saying your accountant is selling tax returns. 

Sounds like a service business. Not making or selling widgets.

On 2/1/2019 at 4:41 PM, Luke Bailey said:

Sounds like a service business. Not making or selling widgets.

Definitely a service business in my view:

• Alternatively, a business is a service organization if capital is not a material income-producing factor. [BL 130] Whether or not capital is a material income producing factor is decided on the basis of all facts and circumstances. The regulations give three examples to illustrate this point:

   

  • Capital is a material income-producing factor for banks and similar institutions.

  • Capital is a material income-producing factor if there is substantial investment in inventories, equipment, plant, and machinery.

  • Capital is not a material income-producing factor if the income of the business comes primarily from fees or commissions for personal services performed by one or more individuals. [Prop. Treas. Reg. §1.414(m)-2(f)(1)]

Given this definition, most all manufacturers, retailers, and wholesalers will not be service organizations, because capital is a material income-producing factor in their business. [BL 76; BL 77]

Seems to me they clearly do not have capital as a material income producing factor; income come primarily from fees for the videos (personal services of teaching).  FWIW.

Let the record reflect that I have liked a post from Larry Starr!