Your business might be a telecommunications company. Now what?

Your business might be a telecommunications company. Now what?

If you read our previous post, 3 signs your tech company is at risk of a telecom tax audit, you know that many tech companies are facing the possibility of entering the complex world of telecommunications taxation. Once you've examined those three key indicators and determined your business could be heading in that direction, the question becomes: What next?

With so many states and agencies facing budget shortfalls due to the decline of traditional telecom services, many jurisdictions are watching closely for new entrants into the telecom tax space. For this reason, it's important to be prepared for the possibility of a telecom tax audit.

If your business is deemed to be a telecom company for tax and regulatory purposes, the following steps can help ensure your company remains compliant.

Step 1: Understand what you're selling

It's often easy to assume that a new technology service will be subject to sales taxes alone, but that's not often the case. If you offer an emerging communications capability — click-to-call or click-to-chat software, "smart" devices capable of making calls, peer-to-peer collaboration tools with texting, and so on — there's a good chance an auditor will be considering which of these offerings falls within the realm of regulated telecom services.

The specific type of service you offer can impact whether you'll be required to contribute to the federal Universal Service Fund, pay state and local 911 fees, collect on hundreds of telecom taxes, or address thousands of possible transactional tax and regulatory filings.

As offerings become more robust, many tech companies will find that a specialist is needed to manage these complex compliance operations.

Step 2: Track where sales are occurring

Are your services being offered in a handful of states? Or nationwide? From a telecom tax perspective, the difference is huge. When it comes to statutory language, the word "telecom" has a slightly different denotation in every state. That means a subscription service could be deemed taxable in one state, but not the next. It also means that a fast-growing company could potentially be looking at hundreds or even thousands of different telecom taxes and regulatory filings at the, state, county, and local levels.

Perhaps most notable: For taxing jurisdictions, there's no risk in requiring compliance on an emerging service. Once an offering is deemed to fall within the realm of telecommunications taxation, it's up to the company to either prove otherwise or risk hefty penalties and fees for noncompliance.

Step 3: Prepare your billing system

Far fewer billing platforms are designed to accommodate the complexities of telecom taxes than typical sales and use taxes. And unfortunately, adding blanket charges to bills in attempts to cover taxes and regulatory fees can backfire with an increased risk of litigation. Telecommunications companies will need to ensure their billing systems are prepared to store and present the correct details (and language) when describing taxes, fees, and surcharges according to individual jurisdictional statutes.

With the pace at which technology is advancing, we expect to see many more tech companies entering the telecom tax space in the near future. To maintain a competitive edge in this uncharted territory, it will be essential to gain a strong understanding of which telecom taxes and regulations will come into play with new products, services, and packages.

Looking for more resources? Stay up to date on the latest trends on our communcations tax resource hub.