Video conferencing, collaboration tools, and taxes: What you need to know

As software companies that serve distributed teams for years are well aware, the remote work trend has been steadily increasing for more than a decade. Gallup’s latest findings indicate that 43% of U.S. employees work remotely some or all of the time. And with numerous studies showing how much more productive and profitable employees can be when they don’t have to commute to an office, it’s no surprise that both companies and their talent base are increasingly embracing this mode of work.

Looking ahead, the implications are clear.

Current estimates indicate the number of employees who work from home will continue to increase over the next two years, as companies that had previously not allowed teleworking become more comfortable with flexible policies in the wake of COVID-19. In one pre-pandemic survey of 2,500 employees, 95% said they’d be encouraging colleagues to join them in working remotely.

This is all great news for the companies that provide remote work technology.

Video conferencing and collaboration platforms in particular are experiencing record-high adoption. One popular video conferencing service saw 600,000 downloads in a single day as the company’s stocks soared; another collaboration platform gained more than 12 million daily users in one week. As team collaboration, customer demos, client meetings, and more are moved to online environments, global downloads of these apps have risen nearly fivefold since the start of 2020.

The growth is massive, and this boom isn’t expected to subside anytime soon, if ever. If businesses aren’t already considering the potential implications of communications tax, now’s the time for them to start.

The line that separates the requirements for sales and use tax from more complex communications tax rates and regulations is a critical one. It can also seem incredibly blurry, especially for those who aren’t well versed in untangling the nuances of these scenarios.

As more and more companies face the possibility of costly communications tax audits, it’s highly important to understand if, when, and how your company is responsible for communications tax. With so many states facing revenue shortfalls as a result of reduced reliance on traditional telecom services, auditors are watching closely for new entrants into the communications tax space.

Each jurisdiction takes its own approach to taxing communications services, which means liabilities can look drastically different from not only one state to another, but even within the same locality. However, there are some key considerations to inform your thinking on whether your service is subject to sales and use tax, communications tax, or both.

Simply put, if any type of communications is at the core of your organization’s capabilities, that’s a strong indicator your company will need to collect and remit communications tax. Here are a few examples that often catch businesses off guard:

• If your platform includes interactivity like click-to-call or video chat, there’s a good chance it allows users to make connections via Voice over Internet Protocol (VoIP). That can potentially open the door to various communications taxes and regulatory oversight. Depending on how users access these services, the tax implications can be significant.
• If you bundle voice, video, and technology services together — either as a single package or along with additional goods or services — these offerings can attract the attention of auditors. Also, it’s important to note that even if these capabilities are bundled, and don’t have an associated price for this feature, that alone doesn’t insulate your service from an obligation to charge, file, and remit communications taxes. You should be especially cautious if you use phrases such as “video calling,” “video chat,” and “internet calling” in your marketing.

These and other typical-but-complicated scenarios can quickly render a business subject to a highly complex web of rules, regulations, and fees — a far more difficult and confusing web than relatively straightforward sales and use tax.

As soon as you’re aware that the complexities of communications taxes could apply to your business, the next step is preparation. The key is to put solutions in place that will:

Unify accurate calculation of all the right taxes. You may have a sales and use tax engine, but these platforms aren’t able to handle the complexities of communications taxes on their own. Tax jurisdictions across the country are working to adapt rates and regulations for fast-growing technologies like video conferencing and collaboration platforms. Moving forward, tax automation systems that unify the ability to calculate sales and use tax as well as specialized communications taxes will be crucial.

Track changes across jurisdictions. Identifying the exact locations of customers is another critical component for compliance. With special taxing jurisdictions on top of federal, state, and local jurisdictions, the volume of potential rule and rate changes that will need to be tracked can become very confusing, very fast. Using a specialized tax engine equipped with tools such as geocoding can go a long way in increasing accuracy and reducing risk.

Develop a surgical understanding of exemptions. Since these services often fall into the realm of business-to-business transactions, many of them are likely to be exempt. Government agencies, schools, houses of worship, and other entities have traditionally been exempt from a sales and use tax perspective — and the same may be true when it comes to communications taxes. In some instances, those exceptions will be similar across both types of taxes. In others, there might be some very distinct and separate rules for what qualifies as an exemption. For this reason, it’s important to have a tax engine process in place for managing exemptions and corresponding documentation.

Whether you’re an industry veteran or you’re brand new to the world of communications tax, keeping up with the many nuances is bound to be overwhelming. Getting the right systems in place today can save you from costly audits and penalties tomorrow.

Want to find out more about how you can prepare? Learn more about Avalara’s communications tax solutions or talk to someone now.