Vehicle telematics and communications tax: What

Vehicle telematics is also used to provide personal roadside assistance, keep tabs on parking locations, alert drivers to dangerous weather and road conditions, provide concierge-style ordering and reservation services, and even to deliver ecommerce orders to trunks via drones.

And that's just for the consumer sector. In the world of fleet management, vehicle telematics gets even more comprehensive with a seemingly never-ending array of operational, diagnostic, and tracking services to increase business productivity.

The consumer applications for automotive telematics are virtually limitless, and continue to expand along with technology advancements. And while this is an exciting area of high-growth potential, there's a much more immediate concern that should first be addressed: taxation.

The complexity of telematics taxation

Automotive telematics is growing at a rate that’s far outpacing state tax guidance. That means manufacturers and telematics service providers alike must proceed with caution to minimize potential communications taxation risks in an exceedingly complex industry.

As new innovations and offerings are rolled out, tax complexities will continue to increase. In this uncertain landscape, even one seemingly small oversight can lead to costly liabilities. This industry sells at large scale, and a massive tax penalty or class action lawsuit are both real possibilities. From resale certificates to consumer-facing verbiage used to describe offerings, there are many areas where a company could inadvertently open itself up to a complicated web of communications taxes and regulatory fees.

To future-proof automotive telematics services, there are a few critical things every provider should do:

  • Steer clear of bundling. This is one of the most important steps automotive companies should take from a transaction tax liability standpoint. Always keep telematics services, which are largely viewed as information services, separate from communications services, which are subject to communications taxation. 

    That means avoiding bundles that place hands-free calling or prepaid phone services using the public switch network alongside automotive telematics, as well as any sort of offer based on the use of both types of services. Doing so could render the entire bundle subject to a variety of transaction taxes and regulatory fees, and the difference can be significant. While sales tax typically falls within the realm of 6–7 percent, communications tax can reach as high as 18 percent.

  • Market with caution. During my time as a tax director in the automotive industry, we had one important procedure: All marketing materials were required to go through the tax department. From web content and brochures to email marketing and advertising, the language used by your marketing team can play a big role in whether or not a service will be deemed liable for communications taxes.

    While automotive pure telematics do not travel over the public switch network — services typically involve direct communication between the call center and the vehicle — hands-free calling services utilizing a third-party wireless carrier or prepaid service do. The tax treatments of each type of service are very different and should be treated as two different offerings in consumer-facing materials. By developing a relationship with the marketing team, tax teams can help ensure external communications don't erroneously offer phone services at times when only telematics services should be presented.

  • Stay up to date. As jurisdictions continue to revisit their approaches to telematics taxation, it's critical to continually monitor state-by-state activities. With the fast pace of constant innovations, tax law changes and rulings can occur at any time. At a minimum, every automotive and telematics company should have dedicated personnel or a vendor to keep track of the latest updates.

    Automotive telematics technology is advancing rapidly, ensuring communications taxation will continue to add complexities for providers. To remain competitive, it's imperative to stay aware of potential tax implications with each new offering or bundle.

Did you know? Avalara for Communications specializes in helping companies stay updated on the latest communications tax complexities. Learn more at avalara.com.