Communications Nexus Tax Tips for Wireless Providers
You’ve heard about nexus before. But this is different. This is about nexus for communications service providers (CSPs).
Many companies think of sales and use tax when determining nexus. They consider retail scenarios where there are physical facilities, equipment, employees and products that are all relatively easy to track.
But what happens when you throw communications technology services into the mix?
Knowing when nexus is triggered can be difficult for any business. Add wireless and Voice over Internet Protocol (VoIP) technologies into the mix, and it has the potential to become downright painful.
In this post, I’d like to share several tips that CSPs can use to competently navigate the rocky roads of nexus as it applies specifically to this industry.
Defining the Relationship
Let’s begin by taking a look at the official definition of “nexus” according to good ol’ Merriam-Webster:
a relationship or connection between people or things
The key word here is “relationship.” When your business has a relationship with the state, you must collect. When you don’t; you won’t. Seems easy enough, right?
Now look at the official definition of “wireless:”
sending and receiving electronic signals by using radio waves
And lastly, the one for “VoIP:”
voice-over internet protocol: a system for converting analogue signals to digital so that telephone calls may be made over the internet
Put the three together, and you have an industry that’s being forced to define relationships with states when there’s nothing but invisible, undetectable radio waves and digital signals to track.
It’s no wonder so many providers get confused. If you’re struggling to decide where you stand with a state, start with these two questions:
1) Where is the service being provided?
2) Where is the customer?
There are several federally mandated rules enforcing how to apply this logic, including the Mobile Telecommunications Sourcing Act (MTSA). According to this act, wireless communications services are taxable at the location of the user’s Place of Primary Use (PPU). It states that a company is subject to a state’s sales and use tax when the user has a residential or business address there—regardless of where the calls themselves originate and end.
So if you provide wireless phone services and your customer lives or works in the state, nexus is triggered. Think of a Missouri customer who lives in Kansas City, Missouri but works in Overland Park, Kansas. When the customer makes a call on the way home from work, the call starts in Kansas but may cross into Missouri during the trip. Which state has the right to tax the calls? Because this is a Missouri customer, Missouri would have the right to tax the calls, not Kansas.
When you look at nexus from this perspective, it almost sounds simple.
When Things Get Complicated
Whether you serve customers in one state or 50, each one will expect that you’re going to register, file and pay. There are no casual relationships when nexus is involved.
When your business begins to expand from one state to several, you have to decide:
Are you fully committed at this stage? What is your liability and responsibility to the state?
If you’re getting ready to open a new market and expect a lot of sales in a particular state, you may want to go ahead and register since that process can take a long time. On the other hand, if you anticipate generating only a minimal amount of revenue in a particular state, you may want to evaluate de minimus filing requirements.
And if you don't yet have the luxury of federal mandates to help determine how to handle nexus—this is true for VoIP—you'll need to use your best judgment.
The Responsibility of Popularity
Being popular has its perks. But when your company grows rapidly, there are more responsibilities to consider.
Every state has different regulations on how and when you file. Each time you enter a new jurisdiction, you’ll need to gain a clear understanding of what the requirements are and how you can remain compliant.
Before you expand your reach too far too fast, ensure you’re equipped to stay updated on all the latest changes. That might mean juggling two dozen different tax requirements in two dozen different states to ensure your company’s compliant with every single law.
It sounds like a lot, I know. But trust us on this one: A few growing pains today can save you from tremendous, and costly, heartache later.
The 2021 sales tax changes report: midyear update
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