With the widespread adoption of so many cutting-edge solutions — click-to-call software, “smart” devices capable of making calls, peer-to-peer collaboration tools with texting, and so on — more and more organizations are facing the possibility that, from a tax perspective, they may soon be considered telecom companies. Whether a company is aware of it or not, this shift can have some serious implications for how business is conducted.
The Taxing Nature of Telecommunications Taxation
For many companies across numerous industries, consumption taxes are a standard component of billing and accounting. However, departments that have become accustomed to factoring in sales tax may be surprised to learn that just one new service or product feature can open the door to a much more complex – and potentially costly – web of telecom taxes and fees. While sales taxes tend to hover around six percent, the taxes and fees collected from companies deemed to provide telecommunications services is often more than double that.
For this reason, it’s important for businesses to understand the impact of precisely what they’re selling, where they’ll be selling it, and how products are being presented to consumers.
Indications that a Business is Entering the Telecom Tax Space
In our work with numerous telecommunications tax leaders, we have identified two key indicators that a traditionally non-telecommunications company may be entering the realm of telecommunications taxation.
First, if a particular offering centers around communications services, there’s a good chance those services could be deemed to fall within the purview of telecom taxes.
For example, because many click-to-call, click-to-chat, or video chat services allow users to make instant connections via Voice over Internet Protocol (VoIP), certain states might classify these under the purview of telecom taxes. Similarly, some chat devices could count as telecommunications services if they’re capable of making calls or syncing to cell phone monthly data plans.
Second, if the language being used to describe an offer reflects the potential for telecom services, it’s likely to catch the attention of state auditors. Words and phrases such as “phone,” “voice,” and “online calling” could trigger a telecom tax audit.
Implications of Becoming a Telecom Company
With so many states and agencies facing budget shortfalls due to the decline of traditional telecom services, it’s important to be prepared for the possibility of a telecom tax audit as overall scrutiny increases. If a business is deemed to be a telecom company for tax and regulatory purposes, certain steps can help ensure the organization remains compliant.
- Track where sales are occurring. When it comes to statutory language, the word “telecom” has a slightly different denotation in every U.S. state. A company that sells a product nationwide could potentially be looking at hundreds of different telecom taxes to accurately track and calculate as well as thousands of federal, state, county, and local transactional tax and regulatory filings. To remain compliant, it’s critical to know when and where the company needs to collect and file.
- Prepare the billing system. Unfortunately, adding a blanket charge to bills in attempts to cover telecom taxes and regulatory fees can backfire with an increased risk of litigation. Telecom companies will need to ensure their billing systems are prepared to store and present the correct details (and language) when describing taxes, fees, and surcharges according to individual jurisdictional statutes.
As increasing consumer demands for innovative technology continue to transform the way businesses and consumers communicate, there is a very high likelihood that many non-telecom tech companies will soon discover they have entered the telecom tax space. To maintain a competitive edge and mitigate compliance risk in this uncharted territory, fast-growing organizations will need to quickly understand and address when a new product, service, or package is likely to bring about new responsibilities with telecom tax authorities and regulators.
Tony Susak is General Manager, Telecom at Avalara for Communications, which keeps companies up-to-date on communications taxes and federal regulations through tax automation software and compliance services. Nothing in this article is intended to provide tax or legal advice, including legal opinions, tax opinions or tax management advice. Readers should conduct due diligence and seek the assistance of a qualified legal, tax, or accounting professional.
Filed Under: Industry regulations