Florida’s Communications Services Tax presents unusual tax compliance challenges

When it comes to taxing communications services, Florida’s system — like its crime news — is anything but typical.

Florida made headlines last year when it started taxing music streaming services like Spotify, making it one of the very few states to do so. Florida applies a specific Communications Services Tax to streaming video and audio and other  communications services.

But to understand how the Florida Communications Services Tax works today, we should start by looking into where it came from.

Twentieth-century telephone tax

Like most states, Florida started out in the last century with  taxes on telephone equipment that used public rights-of-way. (Think of how telephone poles line the sides of roads.) That expanded over time as Florida added additional taxes and maintenance fees that were tied to the physical elements of old-school, copper-wire telephone networks.

However, the birth of the cell phone industry in the 1990s upended this. Cell phone network operators began to challenge states that tried to enforce traditional telephone taxes on the new wireless networks. One of their arguments was that since their networks didn’t need public rights of way, they shouldn’t be taxed like legacy phone networks that did utilize physical objects in public spaces. These lawsuits wound through state and federal courts for years.

The Florida Legislature, faced with the possibility of losing state and local phone tax revenues through judicial rulings, decided to act before that happened, and in 2001, it passed the Florida Communications Services Tax (CST) that’s in effect today.

Revenue streams from streaming

Florida’s CST is levied on cell, landline, and voice-over-internet protocol (VoIP) phone services; cable and satellite television; video and music streaming; and other related services. There’s a partial exemption for households that still have phone service.

When Florida legislators sat down to write the bill, they seem to have made a concerted effort to avoid some of the problems of the day and instead “future-proof” the tax rules so they’d apply to any kind of new technology that might be developed in the days ahead.

The language of the bill was written broadly, with very little that ties taxes to specific communications technologies or delivery mechanisms. As a result, as new technologies have been introduced over the past two decades, Florida has generally been able to extend the existing tax laws to them.

For example, it’s fair to assume that in 2001 most legislators weren’t thinking about taxing streaming video services; folks were just getting excited about getting Netflix envelopes in the mail. But thanks to that broad statutory language, Floridians have paid the CST to binge-watch “Tiger King,” “Cobra Kai,” “Ted Lasso,” and reruns of “Gilmore Girls,” pumping more than a billion dollars a year into state and local treasuries.

Florida also began applying the CST to streaming audio services — making it one of the few states to do so. There is relatively little historic tax treatment for audio products because the legacy competitor, terrestrial radio, is free and states have little motivation to consider taxing something that is free.  While other states were generally left flat footed when customers began paying subscriptions for audio products, the broad language in the Florida tax statute left the door open and the tax authorities have taken advantage of it. 

As new services appear, Florida keeps reinterpreting the law to say they’re covered under the existing legislation, which will very likely continue with new technologies and services. 

CST was simplified, but it’s far from simple

When adopted in 2001, the tax was hailed as a measure to streamline and simplify Florida’s telephone tax laws.

In a sense, the CST did achieve that. Florida got rid of the grab bag of various taxes, replacing it with something that streamlined administration throughout the state.

But just because the tax code was simplified doesn’t necessarily mean it’s simple. In fact, critics within Florida point to its complexity as one of the biggest problems with the Florida Communications Services Tax.

The tax starts with a statewide tax rate of 7.4% Florida is unique in that this state communications tax is levied in lieu of the regular state sales tax (which in Florida is 7%). So while a number of states levy sales tax on communications services, Florida does not.

On top of that, there are 481 separate local jurisdictions charging local communications services taxes. Those rates range from 0.3% in the city of Lake Buena Vista to 7.6% in the city of Sanford and also unincorporated Alachula County.

(For reference, the CST rate is Miami is 5.72%; Orlando is at 5.52%, and Jacksonville and Tampa both are at 6.02%. The statewide median is 5.7%.)

So, depending on where a customer is located within Florida, communications businesses need to collect a combined state and local CST of anywhere from 7.7% to 15%.

Even within counties, CST rates can vary widely. In rural Washington County, in the Florida Panhandle, the rate in the county seat of Chipley is 6.22% — but drive a half-hour south to the tiny town of Ebro, and the 226 residents there pay a CST of 1.4%.

As noted, Florida has a 7% sales tax rate. Six jurisdictions (including Lakeland with a population of 112,000) have local CSTs that are higher than that. Combine those local taxes with Florida’s statewide CST of 7.4% and you’ve got a combined tax rate greater than 14%.

Florida might not be an outlier for long

Other states may start edging in Florida’s direction.

The rise of Zoom, WhatsApp, and other over-the-top communication services that deliver text, audio, and other content over data networks threatens to undermine the communications tax structures of many states. That’s because those states have regimes based on taxing telephone-based services, like voice and private lines. 

Over-the-top services are often significantly less expensive for consumers, which leads them to use these internet-based services more, while they use taxable telephone service less. 

Therefore, every social media direct message that takes place instead of a phone call takes a little bit away from the tax collector.

In 2022, we spend more and more and more on internet connectivity and less on talking. As a result, the government services funded by communications taxes are all getting supported by the shrinking side of the industry.

With tax changes almost certain to follow future technology advances, leaders in the communications industry will need to keep an eye on state-specific developments. Qualified partners like Avalara can help companies meet their new and changing communications tax compliance needs

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