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Communications Tax

Navigating Communications Tax Complexities


Across sectors, countless businesses are learning that new technologies are on the hook for regulatory fees and special taxes. In this article, Toby Bargar, attorney and Senior Tax Consultant in the Avalara's Communications business unit, helps navigate the myriad complexities of communications tax.

Aug 12th 2021
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Have your business clients recently discovered they’re liable for communications tax? If so, they’re far from alone. Now, the question is: How will you stay compliant?

The answer may not be as simple as you'd initially think. Communications tax can be very different from sales and use tax. And depending on the number of geographic markets your clients serve, it can get highly complex.

The Complexities of Communications Tax

The term communications tax refers to a multitude of taxes, fees, and requirements imposed by federal, state, local, and municipal governments. It includes everything from long-standing telecommunications taxes to relatively new streaming taxes, and encompasses a host of regulatory fees, public utility fees, emergency fees, and more.

Depending on the types of services your clients provide, they may be liable for 911 and 988 fees, the Federal Universal Service Fund (FUSF) fee, telecommunications relay services (TRS) fees, utility user taxes (UUT), and the communications services tax (CST) — to name a few.

All of those fees and taxes must be built out on top of an already-complex foundation of sales and use tax. You'll need to help clients figure out which jurisdictions require what types of communications tax, including those touched across their supply chain, and then present proper clarity in billing.

Because every state and local jurisdiction takes its own approach to communications tax, each line item on a single bill could be subject to its own unique combination of taxes and fees. And unlike sales and use tax, there’s no way to simply tally up the total and then calculate tax.

These are the kinds of scenarios companies can face after adding voice, video, or connectivity to a product or service. And it’s up to the business to correctly identify which communications taxes and regulatory fees apply.

For a larger company with a national footprint, that could mean tracking as many as 60,000 taxing jurisdictions across North America to stay current on hundreds or even thousands of compliance requirements. And because rules and rates change constantly, they need to be continually monitored for updates.

So, how do you make those determinations? While most of these taxes and fees were originally created for traditional voice, pay TV, and networking services, many are now being applied to a wide range of new technologies.

SaaS and UCaaS platforms, managed service providers, streaming platforms, and IoT connections are all potentially on the hook, as are many hosting, SDN, and cloud service companies. As communications tax authorities work to catch up with the pace of technology innovation, there is some confusion.

If your clients are selling the latest and greatest items, there may be controversy about a given product’s inclusion in various tax bases. And if they're still relying on a sales tax engine alone, they may be at risk. In short, staying up-to-date on the many complexities of communications tax compliance will require specialized tax software and billing solutions.

When a Sales Tax Engine is No Longer Enough

As you begin to assess which communications taxes apply to your clients’ products and services, you’ll soon discover there’s more than just taxes and fees to worry about. In many instances, tax treatments will vary based on your client’s business model, pricing strategies, merchandising methods, and more.

For example:

Each time they bundle products together, they open the door to a wide range of complex calculations that must be billed and reported accurately. Services like calling, SMS, videoconferencing, and click-to-call could each be subject to its own separate set of communications taxes across jurisdictions. And in some jurisdictions, including just one communications-taxable item can make the entire bundle subject to communications tax.

When adding fees to a bill, they’ll need to be conscious of the potential for tax on tax complexities. These can come into play when a regulatory fee is added as a surcharge, which many states view as yet another taxable receipt. These additional communications tax amounts often need to be calculated to the diminishing penny — and can get very confusing, very fast.

Sales and use tax engines are not built to handle this level of complexity on their own. And each time you opt to file sales and use tax alone, the risk of a potential communications tax audit resulting in hefty fines and penalties can increase.

How to Get Ahead With Communications Tax Compliance

If a company still serves customers in only a handful of local markets, it may be possible for them to manage their compliance risk on their own — for a while, at least. However, many billing systems and sales tax engines are not built to meet the constant pace of communications tax changes.

For this reason, many companies on the communications tax bubble are turning to specialized software to automate calculations, streamline billing, and generate accurate returns. In many scenarios, tax automation systems that unify the abilities to calculate sales and use tax as well as specialized communications taxes become crucial.

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