Communications Tax Survival Guide
The communications industry changes every day. The rapid pace of tech trends, innovations, mergers, and acquisitions—not to mention the ever-evolving political landscape—all impact the taxation of services ranging from wireless and VoIP to unified communications and managed services. And that’s before you begin to factor in complexities related to things like bundling and identifying customer locations.
It’s no wonder those charged with communications tax responsibility struggle to remain compliant. With more than 12,000 tax jurisdictions in a constant state of flux, the mere act of monitoring all those changes is a full-time job. It can often feel like a struggle to simply survive.
And when you’re in survival mode, you need a survival guide.
In this white paper, we summarize the top challenges facing communications service providers (CSPs) today, and offer several tactics that can be used to not only survive, but thrive, in their midst.
Challenge #1: Managing Compliance Processes with Complex Nexus
Survival Tactic: Dedicated Communications Compliance Specialists
Knowing when nexus is triggered can be difficult for any business. Factor in communications technology where there’s little more than invisible, undetectable radio waves and digital signals to track, and the process of managing compliance across numerous jurisdictions has the potential to become incredibly painful.
The reason: Many companies think of sales and use taxes when determining if they have compliance obligations to a state, and consider retail scenarios where there are physical facilities, equipment, employees, and products that are relatively easy to track. But while a large warehouse or retail storefront presence may be a strong indicator that a company will fall within a state’s definition of nexus from a sales and use tax perspective, a very different set of factors will apply when deciding when a CSP is obligated to register and comply with state communications taxes. Even if a CSP does not own any network infrastructure in a state, complicated resale relationships with companies that do have infrastructure can create a legal relationship with physical facilities that may be counted towards a seller’s presence in the state.
To complicate matters further, the minimum thresholds vary wildly from state to state. In some states where economic nexus is being adopted, the amount of sales in the state will determine when a CSP is required to comply with communications tax laws. In others, nexus is based on where your customers live and work. (And the list goes on... and on and on.)
Meanwhile, communications business models and the technology that drives them change all the time. So even if a tax manager understands what’s needed for compliance across states today, there’s no guarantee it will be the same in a month or a year.
Remaining compliant means continually monitoring multiple jurisdictions to ensure the correct communications taxes are remitted everywhere the company has nexus. And that’s a job for communications compliance specialists. Each time a communications business expands to a new jurisdiction, dedicated experts will need to gain a clear understanding of what the requirements are and how the company can remain compliant—and then meticulously manage and adjust returns as activities and revenue streams evolve. Outsourcing the job to specialized professionals or designating a team of internal experts not only frees up staff to focus on critical business matters, but also ensures continual compliance across states as a company grows.
Challenge #2: Keeping up with Rate Changes Across Jurisdictions
Survival Tactic: Specialized Communications Tax Automation
In the advancing world of communications, there’s so much more at stake than sales and use tax. Each new communications technology leads to new questions around communications taxes and regulations.
How should states respond to this year’s innovations? What will federal agencies regulate next? Which taxes and fees will be applied, and when? Governing bodies are asking these questions and many others like them, and so should CSPs.
The number of different rules and rates that must be monitored will continue to multiply each time a company grows to serve customers in another state. And things change constantly. There are thousands of tax jurisdictions in America, and each one is working to keep its regulations current with rapidly-changing communications technology. As a result, communications tax law can change suddenly and drastically. (Just consider what happened in Pennsylvania: Once the Supreme Court ruled that the state’s gross receipts tax does apply to a wide range of repairs and services, Verizon was forced to pay $48 million in back taxes 11 years after a 2004 filing.)
Before a CSP expands its reach too far too fast, it’s critical that the company is first equipped to stay updated on all the latest changes in each and every jurisdiction.
The surest way to ensure communications tax accuracy across numerous states? Use a communications tax automation solution that’s dedicated solely to tracking and applying the latest rates across U.S. tax jurisdictions— all 70,000+ of them. The key is to automate with a focus on communications tax, and not just sales and use tax, to ensure the vast range of complex calculations, fees, and surcharges will be monitored as they evolve.
Challenge #3: Avoiding Miscalculations Resulting from Incorrect Locations
Survival Tactic: Geo-coding
In the world of communications taxation, location matters a lot. Pinpointing jurisdictions at the national, state, and local levels can have a big impact on compliance with communications taxes and regulations. Including incorrect customer locations on bills can result in underpayments to the appropriate taxing jurisdictions and lead to increased penalties and audit risks. It can also result in tax overpayments and lost revenue.
However, it’s one thing to know you need to accurately source locations and another to get it right. Many of the location elements associated with billing addresses — street names, zip codes, phone numbers—seem simple on the surface but in fact are riddled with complications in the post-wired line era. Because actual jurisdictional boundaries often don’t align with addresses, zip codes, and other identifiers, CSPs that rely heavily on these less precise methods may be putting themselves at risk.
For example, when determining taxes based on a wireless customer’s place of primary use (PPU), any number of issues can arise: An incomplete address could fail to reflect special tax districts or unincorporated areas, or the zip code database may have changed yet again. Or the information itself might not actually represent a “place of use,” but rather a placeholder such as a P.O. box or virtual phone number.
When a company fails to properly identify customer jurisdictions, tax calculations are virtually guaranteed to be inaccurate. Failing to get locations right not only impacts profitability but can put a company in danger of unhappy customers, costly litigation, or non-compliance fees and fines. In fact, several jurisdictions aggressively target CSPs for location identification audits. These audits are attractive because they can find liability without having to use experts who understand the more complicated issues of communications technology and tax law. They just have to establish that you applied tax in the wrong location, regardless of whether the services were otherwise taxed appropriately.
Accurately pinpointing jurisdictions at the national, state, and local levels—all the way down to special tax districts— is a job that requires geo-coding. Geo-coding allows a company to identify the exact geographic coordinates of an address. This type of GIS-based automation ensures true accuracy in a way other methods can’t. By adding a geo-coding component to tax automation software, communications service providers can identify customer locations with confidence.
Challenge #4: Applying the Right Rates to Bundled Pricing
Survival Tactic: Meticulous Records and Communications Tax Expertise
The implications of continually changing rates and rules are especially acute when it comes to bundled pricing. As soon as non-taxable services are packaged together with taxable ones, the entire bundle potentially becomes subject to communications taxes and regulatory fees. However, there are effective strategies to unbundle or allocate taxes across services with lower risk. For example, a company might separate out each component of a bundle on the invoice—as though it was sold à la carte style—and apply the appropriate communications taxes to each item on the bill. With proper preparation, the CSP may be able to charge one consistent price on the bills sent to customers while internally separating out each piece for taxation purposes.
Whether a provider chooses one of these options or pays full tax on the entire bundle, compliance will require constant research, validation, and updating of tax rates across states—not to mention maintaining meticulous usage records to justify unbundling methods to an auditor. If the CSP does unbundle the bundle for tax purposes, they will be faced with the delicate matter of accurately identifying the value of each unbundled component.
And if that weren’t involved enough, tax managers will need to keep tabs on what’s allowed in each state. While many states allow unbundling for taxation, some are stricter. And even when a state does allow unbundling, applying the correct percentages based on that particular state’s rules can be the difference between compliance and hefty penalties.
The best method for ensuring accurate tax rates on bundles is to use a specialized tax automation solution that supports unbundling and monitors relevant rate changes as they evolve. For the provider that offers many different package options in a wide range of states, it may be necessary to add a human component (by way of specialized professional services) to help determine which practices to use in each state.
A Streamlined Solution
The communications industry changes constantly, and the pace seems to be increasing. As federal, state, and local jurisdictions work to align tax laws with new communications technologies and innovations, providers should remain vigilant of the many challenges that arise as a result.
At Avalara, many of these challenges are made non-issues through a variety of capabilities—ranging from specialized compliance experts and professional services to an automation platform that supports geo-coding, unbundling, and more—designed specifically to keep providers up-to-date on the latest rules, rates, and filing requirements across tens of thousands of tax jurisdictions.
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