telephone pole

Do you provide phone, VoIP or other wired communications services in Pennsylvania? No doubt you’ve been following the state’s case against Verizon. Last month’s decision by the Pennsylvania Supreme Court left the company liable for tens of millions of dollars it now owes the state.

That ruling has left many communications providers—big and small—scrambling to determine what the implications will be for their own tax filings after years of waiting to see how Verizon would fare. As early as 2013, according to the Associated Press, the Pennsylvania Telephone Association was warning of the potential for “great financial and operational significance” to other communications companies.

So…

What does the decision mean for your organization? Here’s a quick overview to help you decide.

How did this happen?

In case you missed our earlier post on this huge news, here’s a quick recap:

The state’s highest court ruled that gross receipts tax does, in fact, apply to charges for installing phone lines, providing directory assistance and performing a variety of repairs and services.

The ruling traces back to a return filed by Verizon in 2004, when the company paid $74 million in gross receipts tax. The Department of Revenue said Verizon was $48 million short—an amount that was later reduced to under $10 million. (The department’s board of appeals determined Verizon could avoid paying taxes on certain non-recurring charges related to installations, maintenance and repairs.)

Fast-forward 11 years, and Verizon is back up to $48 million after the state Supreme Court determined that revenue from all of those services is taxable.

Why the full $48 million?

In the court’s opinion, services such as directory assistance are subject to gross receipts tax because they “enable Verizon’s customers to transmit messages more satisfactorily.” Addressing one specific service that initiates calls to requested phone numbers, the court had this to say:

The customer thus avoids the need to transcribe the number, disconnect the call with the operator or platform, and then redial the number of the party with whom he or she wishes to communicate. This saves the customer time and enables him or her to make the telephone call…Consequently, revenues Verizon receives therefrom are also taxable gross receipts.

In other words, a wide variety of services that enhance or facilitate the customer’s calling experience now have to be considered for tax. That applies to all wired communications services—and not just phone services.

What does it mean for your organization?

The answer to this question all comes down to what you’ve filed for the past decade. Here are two essential questions you can answer to begin determining what steps to take next:

  1. What ancillary services do you provide?

Be sure to account for all of them: directory assistance, installation, activation, repairs, maintenance and so on.

  1. How many of those services have you collected and remitted gross receipts tax?

If the answer is “all of them,” you should be in good shape. If the answer is “some” or “none,” it’s time to start looking into the following options:

  • Apply for the Pennsylvania Voluntary Disclosure Program if you qualify (and aren’t already a registered filer)
  • Amend past returns
  • Get a system in place that accurately treats future ancillary charges as revenue so you can report and tax accordingly

Feeling overwhelmed? Avalara can help!

This is just one example of how suddenly and drastically communications tax law can change. There are thousands of tax jurisdictions in America—and each one is working to keep its regulations current with rapidly-evolving communications technology.

The Avalara Communications research team identified the Verizon case as a critical issue years ago and updated our software accordingly. Important changes like these are always automated to help our customers more easily take steps to achieve and maintain compliance.

Discover the Avalara difference. Visit communications.avalara.com to sign up for our emails, and we’ll deliver communications tax compliance tips and tools straight to your inbox.