Quick question for communications service providers of phone, VoIP or broadband services who are still relatively new to the industry:
Do you know what all of your reporting requirements are? Have you properly categorized your revenue for that reporting? Are you 100% certain you’ve accounted for every possible classification?
If you answered “no” …well, you’re not alone. Far from it, in fact. Many CSPs overlook this important step when starting out.
When processing transactions, it’s imperative to be thoughtful about what information is collected, how it’s summarized and where it’s stored in each of your various financial and reporting systems. Without a high level of detail, it can be a real struggle to pull all of the required information necessary for completing end-of-year communications tax filings.
On the other hand, if you can learn how to efficiently classify revenue now, it will make things a lot easier when it comes time to comply with federal and state regulations. Proper categorization up front will help ensure you avoid major headaches later on.
And not just a dull ache that disappears with a dose of aspirin. We’re talking about the potential for a mega, million-dollar migraine that builds up as a result of incomplete documentation and then explodes with the arrival of a new regulatory form.
What do I mean by that, you ask? Keep reading to find out. In this post, we’ll take a look at why categorizing revenue at the outset is so important, and how your company can start this process today.
Why Categorize Revenue?
The communications industry faces countless reporting requirements and regulatory forms. Some are so complex that they can take days or weeks of analysis just for the first-timer to comprehend it all. Many requirements are still evolving as governments adapt to new technologies. Yet all require complete compliance.
Without a system designed to quickly pull the necessary information, the seemingly simple task of filling out a form can quickly become a daunting, time-consuming undertaking.
For example, the communications tax filing team here at Avalara recently worked with a communications service provider based in California. Because the company’s vendor wasn’t categorizing revenue as part of the billing and taxation process, we weren’t able to extract the exact information needed for regulatory reporting. Instead, we had to extrapolate their sales by reviewing the company’s tax liabilities and jurisdictions and then tying them to annual revenue. This process resulted in a $4 million (yes, four million!) discrepancy between the company’s general ledger and revenue reporting from a tax and compliance perspective.
Needless to say, members of the tax team at this particular CSP now have a lot of work ahead of them—the kind that will require re-engineering an entire system with assistance from outside consultants.
Your company can avoid this kind of expensive fiasco, simply by ensuring categorization is set up correctly from the outset.
When Categorization Pays Off
Why not just wait and categorize revenue as a part of the reporting process, you ask?
Consider Form 499-A. This eight-page federal regulatory form is preceded by 50+ pages of instructions on how to break out profits into a bevy of highly detailed categories. Filling it out correctly requires dissecting every last bit of revenue and correctly placing the pieces into comprehensive “buckets.”
For example, when completing this form, the filer must:
- Assign its gross billed revenue to reporting categories, which includes allocating revenues from bundled services between their telecommunications and non-telecommunications components
- Attribute communications revenues derived from sales to contributing resellers, or from sales to end users
- Apportion revenues between intrastate, interstate and international jurisdictions
Imagine what it would be like to have direct access to all the right categories, migrated from your general ledger to your tax reporting engine for easy extraction and immediate analysis. Sounds so much easier than sorting an entire year’s worth of transactions, doesn’t it?
And it’s not just federal forms you need to worry about. Many states require companies to break out revenue in dozens of different ways. Often, sales tax will need to be broken out based on whether it’s related to telecom services (which sometimes has tax on tax implications) or tangible personal property (which doesn’t).
It’s critically important to be prepared to report the correct figures if you want to avoid the sting of a painful audit.
To prevent unnecessary difficulties and audit liabilities, there are a couple of key steps you can begin taking today to ensure you’re as prepared as possible to remain compliant, be efficient and ensure accuracy.
First, make sure you have a good general ledger package that integrates seamlessly with your tax engine and billing system. Then consult with an expert—hire an outside advisor if you have to—who can help you categorize in a way that will make it easy to capture the exact data elements needed each time you face another reporting requirement. And lastly, you’ll need an IT professional who can help connect your various solutions to ensure those data points are pushed seamlessly from one system to another.
The more data you can categorize at the time it’s captured, the less pain your organization will experience down the road.
After all, wouldn’t you rather devote your most productive work hours to growing your revenue—instead of trudging through the weeds of reporting on it?
Did you know? AvaTax for Communications maintains TSR files that map revenue by state, transaction and service type. These detailed TSR reports can be used to complete Form 499-A and other tax compliance returns more quickly. Learn more at communications.avalara.com.