Are Safe Harbor Ratios the Best Way to Achieve FCC Compliance?

Remember the answering machine? These electronic contraptions let you replay recorded messages on cassette tapes after returning home from phone-free travel.

How quaint.

Today’s phone messages are stored in microcomputers we carry around in our pockets. There’s Bluetooth technology for making hands-free calls while crossing state lines and Voice over Internet Protocol (VoIP) when we want to speak with someone on the other side of the world without incurring long-distance fees.

Once upon a time, landlines were all anyone had. The Federal Communications Commission and phone companies had it so easy back then. You could simply segment intrastate, interstate and international calls and then charge and pay tax accordingly. Everything was neatly categorized in unbundled bills, so calculating and reporting was a cinch.

Then came the era of new and amazing mobile technologies.

Which created a bit of a tax mess.

Today, the technology is evolving so furiously fast that it’s virtually impossible for the law to keep pace. This can make it very difficult—not to mention costly—for growing communications companies to remain compliant.

To help, the FCC introduced safe harbor ratios.

This option is designed to simplify calculation and remittance for companies struggling to determine which portions of revenue come from wireless interstate calls. Here’s how the agency describes the option:

“Wireless telecommunications providers and interconnected VoIP providers that choose to avail themselves of these safe harbor percentages for interstate revenues may assume that the FCC will not find it necessary to review or question the data underlying their reported percentages.”

If you’re willing to accept the FCC’s predetermined ratios, you’re off the hook for tracking where each and every phone call takes place.

Safe harbor makes it easier to file a 499 form. But is it right for you? The answer depends on several key factors. Here are a few considerations to help you decide:

#1: How do current safe harbor ratios compare to your own?

At a minimum, every communications company should conduct an informal traffic assessment—even if it’s a matter of picking up the phone to get a ballpark estimate of how much revenue is generated by interstate and international calls.

This will help you determine if safe harbor is a viable option.

For example, you might be surprised to find that safe harbor ratios are on the low end of your current interstate revenue sources. On the other hand, if your own percentages are significantly lower than the FCC’s, you may be losing money to safe harbor.

#2: How much would traffic studies cost your company?

If the safe harbor ratio appears to be significantly higher than your actual interstate percentages, it’s time to consider investing in your own full-blown evaluations. Before conducting your first traffic study, consider:

• The cost of the study itself
• The sum of associated costs

Quarterly filing requirements add operational costs, attorney fees and other related expenses. So if you anticipate 60% of VoIP communications to be interstate, filing new reports four times a year may end up costing just as much (if not more) than the 64.9% safe harbor ratio.

If you do have a ratio that’s significantly different from the FCC’s, traffic studies can significantly reduce your collection and contribution amounts. Just ensure they’re worth your while before going down this road.

And remember: You’re not required to use the same approach for both wireless and VoIP. So even if you take the safe harbor ratio for VoIP, you’ll still have the option of using traffic studies for wireless calls.

#3: How are things changing?

Even if you opt for safe harbor ratios, it’s not necessarily a one-and-done deal. Products change. Service areas change. Customer communications habits change.

And while the FCC’s safe harbor ratios have remained stable for nearly a decade, that could change at any time. After all, the wireless ratio has more than doubled—from 15% to 37.1%—since it was first introduced.

The good news? You’re not permanently locked into a decision:

“All affiliated wireless telecommunications providers and interconnected VoIP providers must make a single election, each quarter, whether to report actual revenues or to use the current safe harbor within the same safe harbor category.”

Did you catch it? The FCC says “each quarter.” This means you have the freedom to regularly re-evaluate as things evolve.

Communications tax calculations and compliance are complicated, but answering these three questions will help make it easier to complete your next 499-Q. If you do determine that a change in how you report is in order, make sure that your billing and tax automation systems are also updated so you begin collecting under the new method in a timely fashion

What about you? Is your company opting for the safe harbor ratio? Or will you be conducting your own traffic studies? I’d love to hear how you came to the decision. Let us know in the comments!

Learn more at communications.avalara.com.