3 signs your tech company is at risk of a telecom tax audit

3 signs your tech company is at risk of a telecom tax audit

It's happening more and more often. A new product launch is on the horizon, and everyone is getting excited.

Then the tax department gets involved, and it starts to become clear that, from a tax perspective, the business is no longer just a tech company — but possibly a telecommunications company, too.

This realization can have significant impacts on how business is done, and it's an issue that's increasingly manifesting within a number of industries: software, health care, transportation, agriculture, industrial, gaming, and many, many more. As cutting-edge solutions — click-to-call or click-to-chat software, "smart" devices capable of making calls, standalone IoT solutions, and others — give people more connection options, many companies will begin to face the complexities of communications taxation for the first time.

The question is: For tax and regulatory purposes, is your company at risk of also being deemed a telecom company? What are the telltale signs, and how can you prepare for the inevitable complications?

The blurry line of telecommunications taxation

From a tax perspective, the line that separates traditional companies, which are accustomed to dealing with consumption taxes, from telecom companies, which must cope with complex telecommunications taxes and regulations, is a critical one.

On the one hand, each new innovation is an opportunity to gain more market share. However, from the perspective of tax authorities and regulators, those groundbreaking offers often signify much more: If a solution is determined to fall within the realm of telecommunications, it can open the door to significant taxation. While sales taxes tend to hover around six percent, taxes and fees collected from companies that have been deemed to provide telecommunications services are often more than double that.

And with so many states and agencies facing budget shortfalls due to the decline of traditional telecom services, state auditors will likely be closely watching for new entrants into the communications tax space.

For the unprepared organization, the consequences can be disastrous. You don't want the day an audit notice arrives to be the day you learn your company has been selling telecom services.

In our work with hundreds of telecom tax leaders, we've identified three key indicators that a traditionally non-telecommunications company may be entering the realm of telecommunications taxation.

1. Communication is at the core of capabilities

It's often easy to assume that newer wireless technologies aren't subject to the same tax treatments as traditional wired telecommunications services, but this is not always the case. As our once-wired world is being transformed by an ever-changing supply of wireless devices and services, authorities are watching for scenarios where telecom taxes and oversight could apply. For example:

  • Many click-to-call and click-to chat services allow users to make instant connections via Voice over Internet Protocol (VoIP), which potentially opens the door to various telecom taxes and regulatory oversight. And because each state takes its own approach to defining non-interconnected VoIP, taxation of these solutions can be highly complex.
  • In the hot new category of consumer devices designed to support video chat, there are many instances where the possibility of telecommunications taxes and regulations could apply — if the device is capable of making calls, for example, or if it syncs to cell phone monthly data plans.
  • Some standalone IoT products use their own designated cellular-based internet connections, such as the agriculture device used to communicate data on temperatures and topography. Because it isn’t simply using a pre-existing internet connection, the IoT device may be subject to significant tax and regulatory obligations.

2. Product information includes telecom terminology

How is your offer being presented to consumers? What's the true object of the transaction? The words that are used to describe a service or product can have a direct impact on whether or not its offering company will be considered a telecom company for taxation purposes.

Examples of words and phrases to watch for include:

  • Phone
  • Phone calls
  • Voice calls
  • Voice-activated calling
  • Click-to-call
  • Internet calling
  • Online calling
  • Call button
  • Video chat
  • Video conferencing  

3. Marketing is going full speed ahead

The first place a telecom tax auditor will go when looking into your business? Your website. If the language used in your marketing materials — your web content, downloadable brochures, Q&As, emails, advertising, point of purchase, and so on — differs from what your tax team is prepared to tell auditors about your products and services, the risk of a telecom tax audit can increase significantly.

Your marketing team has the best of intentions, of course. Certain promotional descriptions simply sell better than others, and potential tax implications aren't measured the way email open rates and digital ad clicks are. It's up to you to ensure your marketing and advertising employees are aware of "danger" words to avoid when creating content for prospects and customers. The goal is to accurately portray your offerings without needlessly leveraging words and phrases that could be scrutinized during an audit.

In conclusion

As increasing consumer demand for innovative technology continues to transform the way businesses and consumers communicate, there's a very high likelihood that many non-telecom tech companies will soon discover they've entered the telecom tax space.

To maintain a competitive edge in this uncharted territory, fast-growing organizations will need to understand when a new product, service, or package is likely to bring about new responsibilities to telecom tax authorities and regulators. The guidelines above are a good place to start when determining what a business is truly selling to consumers, and when it's time to start preparing for the possibility of a telecom tax audit.

Do the above signs apply to your company? Stay tuned Next up, we'll share steps you can take to be fully prepared should a telecom tax audit notice arrive.

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