Communications tax risks: How digital services can trigger new liabilities

Most businesses understand they need to manage sales tax obligations. But for companies offering digital services, another category of tax is becoming increasingly important: communications taxes.

Historically, communications taxes applied primarily to traditional telephone companies, cable providers, and other legacy telecommunications businesses. These include traditional communications taxes such as utility users tax (UUT), communication service taxes (CST), universal service funds (USF), public utility commission (PUC) taxes, and E911 charges.

However, as consumers (and their tax dollars) migrate to different technology, states and local governments are expanding existing tax frameworks and creating new taxes to include newer services, such as streaming and cloud communications, messaging platforms, and connected devices. For digital businesses, proactively understanding potential communications tax obligations is essential to avoiding compliance gaps as regulations continue to evolve.

• Communications taxes apply beyond traditional telecom. Modern digital services, including streaming platforms, VoIP, SaaS, and IoT devices, are increasingly subject to complex communications taxes and regulatory fees.
• Sales tax compliance doesn’t cover communications tax. Communications taxes are governed by different rules, sourcing methods, and registration requirements than standard sales and use tax, creating hidden audit risks for digital businesses.
• State tax frameworks are rapidly evolving. Jurisdictions are aggressively targeting digital services to replace declining traditional telecom revenues, enacting new measures like digital advertising taxes, data collection fees, and expanded amusement taxes.

Communications taxes were originally designed around sales of services that were easy to identify, such as traditional telephone lines and cable subscriptions. As technology developed, jurisdictions have expanded communications taxes to include newer services such as:

• Voice over Internet Protocol (VoIP)
• Wireless services
• Broadband access
• Satellite communications
• Teleconferencing
• Communications platform as a service (CPaaS)
• Managed service providers (MSPs) offering telecom or bundled IT services
• Unified communications-as-a-service (UCaaS) solutions
• Streaming services, including streaming radio; over-the-top (OTT) video; and fitness, education, healthcare, wellness, and other niche streaming subscriptions
• Private network services
• Software-defined networking (SD-WAN)
• Private wireless and Internet of Things (IoT)
• SaaS platforms that integrate calling, SMS, or video

For example, when streaming first became mainstream, many jurisdictions treated it as a digital product or information service rather than a communications service. Over time, that has changed in various jurisdictions.

Chicago, for instance, applies an amusement tax to paid television programming delivered electronically, including streaming services. And New York state is considering a bill to establish a tax on video streaming services and create a fund to support broadband access, community media, arts, and technology.

Finances are a major reason for this shift. Revenue from traditional telecommunications services that fund critical programs such as E911 services, universal service initiatives, and public infrastructure has declined, so jurisdictions are setting their sights on emerging communications/content providers as they seek new funding sources.

One of the biggest misconceptions among businesses is that sales tax compliance automatically covers communications tax obligations. In reality, sales taxes and communications taxes are often completely separate. That means communications tax is a different framework with its own rules, registration requirements, filing obligations, sourcing methods, and calculations.

Communications taxes also tend to be more complex than sales tax. Communications transactions can involve several different taxes on a single line item. They may also be based on jurisdictional boundaries that have nothing to do with standard state and county lines, such as library district taxes, special utility districts, and other hyperlocal levies.

Florida is a prime example of the separation of sales tax and communications tax. Florida generally doesn’t subject electronically delivered digital goods to sales and use tax because they’re not treated as tangible personal property. However, certain digital services — including streaming video, direct-to-home satellite services, and other communications services — may be subject to Florida’s Communications Services Tax (CST).

A Florida sales tax registration does not by itself satisfy the separate registration requirements for businesses subject to CST. Likewise, CST registration does not replace any sales tax obligations that may apply to a business’s other taxable products or services. And most standard sales tax solutions focus only on sales taxes, missing communications taxes completely. So even if a business has a sales tax solution in place to manage general transactional taxes, they can still have significant communications tax exposure.

For many businesses, this compliance gap appears after entering a new market, being involved in a merger or acquisition, expanding into new service offerings, launching a feature that changes how customers access or use a product, or bundling services. By the time a business recognizes the issue, it may already be facing years of unaddressed liability.

Remediation can require registering in new jurisdictions; reconstructing historical tax data; filing back returns; paying assessments, penalties, and interest; and implementing new compliance processes — all while responding to auditors and maintaining day-to-day operations. In the midst of a transaction, unresolved liabilities can delay closing, reduce valuation, or result in buyers withholding substantial funds to cover outstanding obligations.

Recent regulatory developments demonstrate how the communications tax landscape is changing.

Vermont modernized the state’s communications tax structure in 2025, including expanding Universal Service Charge requirements to interconnected VoIP services.

Meanwhile, Maine took a different approach, applying sales taxes to digital services rather than imposing new communications taxes. Effective January 1, 2026, the state repealed its Service Provider Tax and moved several previously covered services — including telecommunications, cable and satellite services, ancillary services, and telecommunications equipment installation and repair — to the state’s sales and use tax framework.

Traditional communications taxes were just the beginning of a larger shift. Regulators are increasingly evaluating new business models and creating new gross receipts taxes, industry-specific fees, environmental surcharges, and other requirements for digital services. Many are either already subject to specific non-sales taxes in certain jurisdictions or could face new obligations as tax frameworks evolve. Examples include:

• Digital advertising. Utah passed a law in March 2026 that creates a targeted advertising tax aimed at businesses that deliver paid, data-driven advertisements to individuals or audiences in Utah.
• Data collection. Chicago introduced a new Social Media Amusement Tax (SMAT), effective January 1, 2026. The tax applies to certain social media companies that collect data from more than 100,000 Chicago consumers annually.
• Environmental surcharges. States such as California are expanding this area, which can include e-waste recovery fees that apply to communications equipment, devices, and bundled services.
• Software-as-a-service (SaaS) platforms. SaaS providers that embed communication features such as messaging, voice, videoconferencing, or data transmission capabilities may face increased scrutiny.
• Smart devices. Connected devices that transmit data, communicate over networks, or rely on embedded connectivity may raise new communications tax questions.

Tax obligations are expanding alongside technology, and businesses shouldn’t assume existing tax processes will automatically address new regulatory requirements. Whether you’re offering streaming, cloud communications, messaging, or other digital services, it’s essential to be proactive about compliance with these steps:

• Regularly evaluate whether your products and services create communications tax obligations.
• Monitor legislative and regulatory changes in the jurisdictions where you do business.
• Build scalable tax processes that can adapt as your offerings and footprint expand.
• Assess whether a communications-specific tax solution is needed to manage requirements that extend beyond traditional sales tax.

Companies that put processes in place to identify potential exposure early can reduce compliance risk and build stronger processes for future growth.

Not sure whether communications tax applies to your business? Your obligations can vary significantly based on your products, services, business model, and where you operate — and the gaps aren’t always obvious. Contact us to find out about your potential obligations and exposure.

No. While communications taxes were originally designed for traditional telephone and cable providers, many jurisdictions have expanded these rules to include modern digital services. Streaming platforms, VoIP providers, CPaaS and UCaaS solutions, SaaS platforms with communication features, and connected devices may all face communications tax obligations depending on the jurisdiction and how the service is structured.

Yes. Sales tax compliance does not automatically cover communications tax obligations. Communications taxes often have separate registration requirements, sourcing rules, filing obligations, and fees that are different from sales and use tax. A business can be compliant with sales tax requirements and still have communications tax exposure.

Businesses should regularly evaluate whether new products, features, or market expansions create communications tax obligations, monitor changes in the jurisdictions where they operate, and build scalable compliance processes. A communications tax solution can help automate calculations, registrations, returns, and regulatory updates as requirements continue to evolve.