Tackling the complex challenge of communications tax compliance

Communications tax can be a lot more complex than sales tax: There are more jurisdictions, stricter reporting standards, and far higher audit dangers. And just as technology continues to expand communications capabilities, the reach of communications tax continues to grow.

• Communications tax compliance is incredibly complex. There are roughly 60,000 state and federal tax jurisdictions, more than 686 tax bases, and over 300 unique tax types. 
• Companies subject to communications tax face a high risk of audit. Common issues like misclassified bundled services, missing exemption certificates, or incorrect sourcing logic can expose businesses to significant financial and reputational risks.
• Automation is critical for managing communications tax complexity because manual processes can’t keep up. Avalara helps businesses quickly adapt to regulatory changes, reducing compliance risk.

Today, you’re likely subject to communications tax if your business sells or provides any of the following to your clients or customers:

• Voice over Internet Protocol (VoIP) services
• Software as a service (SaaS) platforms
• Communications platform as a service (CPaaS) offerings
• Managed service providers (MSPs) offering telecom or bundled IT services
• Unified communications as a service (UCaaS) solutions
• Over-the-top (OTT) streaming, or delivering video and/or audio content over the internet
• Smart devices

This breadth and complexity make communications tax far more than just a finance team issue. It’s a compliance risk, a revenue risk, and even a brand trust risk.

With around 60,000 state and federal tax revenue jurisdictions across North America, over 300 unique tax types, and 685-plus tax bases (many overlapping and conflicting), figuring out communications tax can be daunting. 

Businesses that bundle services have it particularly rough. Not only do they need to make complex tax calculations depending on which services are included in a package, in some jurisdictions including just one taxable service in a bundle makes the entire bundle subject to communications tax.  

Including hardware or devices in a bundle can complicate matters further because states such as California are implementing electronic waste (e-waste) recovery fees. That means providers may need to account for environmental surcharges along with traditional telecom taxes. See this Avalara guide for additional info on these fees and other anticipated communications tax changes for 2026.

Many businesses don’t realize they have these obligations. But even if they do understand their compliance requirements, they need to try to keep up with hundreds or even thousands of different rates and rules. 

Ever-evolving rules and interpretations

Just like sales tax, communications tax rates and rules can change frequently; a business could be 100% compliant in one jurisdiction and completely exposed in another, even for the same service. And just in the past couple of years, we’ve seen significant new interpretations from courts and regulators.

For instance, the Federal Universal Service Fund (USF), paid by communications companies based on revenue (and typically passed through to consumers as a line item on bills), was long considered a fee, not a tax. In 2024, a federal court threw everything into question by ruling that it is a tax — and unconstitutional to boot. But then in July 2025, the U.S. Supreme Court upheld the constitutionality of FUSF. Got whiplash yet?

Another case in Washington state showed that some courts are taking a broad view of taxing authority over utilities such as phone service. One company that resells airtime from third-party cellular networks argued that it isn’t a “telephone business” as defined by state law, but the court ruled the business is subject to municipal utility taxes. According to the Sales Tax Institute, this decision could have significant implications on a wider scale.

The takeaway? Even when you think you’ve got communications tax figured out, there’s likely some new wrinkle just around the corner.

Given this complexity and an ever-evolving tax landscape, it’s no surprise that companies subject to communications taxes are at high risk when it comes to audits. Here are just a few of the common pitfalls that can trigger regulatory review:

🚩 Improperly allocated bundled services
 If you’re selling voice + data + software, regulators could reclassify your bundle and charge more tax. 

🚩 Mislabeled taxes and surcharges 
Truth-in-billing violations are low-hanging fruit for auditors — and a big trust issue for customers. 

🚩 Incorrect sourcing logic 
ZIP codes are not good enough to determine tax rates and rules. You need origin-and-destination-based sourcing, especially in home rule states. 

🚩 Expired or missing exemption certificates 
Even if your customer should be exempt from communications tax (or sales tax), you’ll be on the hook if you can’t prove it.

🚩 Misclassified environmental fees
New state-level surcharges, such as e-waste recovery fees, require proper categorization to avoid dual exposure in both environmental and telecom audits.

Do you understand your exposure to communications tax? Are you ready for an audit? Ask yourself the following questions — if you can’t confidently answer “yes” to all of them, you might be at risk. 

• Can you prove where your communications service originates and terminates? 
• Are all your exemption certificates current, valid, and linked to transactions? 
• Do your bundles have defensible tax allocations? 
• Do your invoices clearly separate taxes, surcharges, and fees? 
• Are your traffic studies documented, recent, and statistically sound? 
• Can your system adapt when tax rules change — without IT rework? 
• Are you using automation or AI to flag potential audit risks?

Manual communications tax processes simply can’t keep up in this rapidly changing environment. That’s why forward-looking SaaS, VoIP, and streaming providers are embracing AI-powered compliance monitoring. Avalara Agentic Tax and Compliance™ helps businesses detect anomalies, adjust to new rules automatically, and stay ahead of audit exposure.

With powerful cloud-based solutions, industry knowledge, extensive experience, and exceptional service, Avalara can increase tax efficiency and reduce tax risk — while helping you future-proof your business.

Avalara AvaTax for Communications 
Our communications tax software delivers automated tax calculations with real-time updates and geolocation precision for federal, state, local, and special tax jurisdictions. 

Avalara Returns for Communications 
Charging the right amount of tax is only the first part of compliance — you’ve got to prepare forms, file returns, and remit payments. Returns for Communications can handle it all, and it integrates seamlessly with AvaTax. 

Avalara ECM Premium 
It’s easy for exemption compliance to fall through the cracks. ECM Premium eliminates gaps and reduces audit exposure by validating, tracking, and storing certificates automatically. You can even get alerts when certificates expire.

If you’re offering modern communications services, you need modern tax solutions. Avalara helps thousands of providers manage complexity, eliminate manual risk, and face audits with confidence.

Contact Avalara today to schedule a personalized demo or compliance audit.

Why is communications tax more complicated than sales tax? 
Communications tax has more jurisdictions (about 60,000) than sales and use tax (more than 12,000). There are also more than 300 different communications tax types, and about 685 different communications tax bases, many of which overlap. 

What are common audit triggers for communications providers? 
Common communications tax issues include improperly bundled services, mislabeled surcharges, incorrect sourcing, and missing or expired exemption certificates.

How does Avalara help improve communications tax compliance? 
Avalara helps improve communications tax compliance by automating communications tax calculations, exemption certificate management, and return filing. Automating these tasks reduces manual errors, supports audit documentation requests, and ensures on-time filing and remittance of communications tax.