Avalara Tax Changes 2024

Communications tax changes

Avalara Tax Changes 2024

Communications tax changes

What communications tax changes are happening in 2024?

The communications industry and technology are intrinsically entwined. Both are constantly changing and the sheer volume of communications services and products makes it tough to keep track of what innovations are subject to communications tax. This is made even harder when states pass new legislation. What’s obvious is that communications services are increasingly playing a bigger role in how we spend our lives and do our jobs.

What the numbers tell us about the communications industry

Chart showing streaming’s share of TV usage at an all-time high of 38.7% in July 2023

SOURCE: Nielsen

Chart showing cable TV network ad revenue falling to below $20 billion by 2027


Graphic showing global subscription video revenues projected to reach $322 billion in 2030, a 145% increase from 2023
Graphic showing worldwide CPaaS market valued at $14.3 billion in 2022 and $29.7 billion in 2026


Graphic showing 75% of enterprise-generated data will be created outside of centralized data centers by 2025

SOURCE: Gartner

IoT, edge computing, and the expanding digital landscape

From kitchen appliances to smart pacemakers to technology that helps farmers fight crop disease, Internet of Things (IoT) devices are changing our lives and transforming the way we do business. IoT devices are used across many industries including retail, utilities, transportation, manufacturing, and government.

The number of IoT connected devices worldwide is forecast to grow to more than 29 billion by 2030, all the while making communications tax more complicated for the businesses that manufacture them. That’s because it’s not always easy to know which communications services and products are subject to tax.

Taxing internet access isn’t allowed under the Permanent Internet Tax Freedom Act (PIFTA). Therefore, an IoT device that simply connects to the internet may not be subject to communications tax. But consider taxability for a device that doesn’t access the internet beyond transmitting data through it. The connection might meet the definition of internet service or could be classified as a wide area network (WAN) or a local area network (LAN), and taxability depends on which category it falls into.

More and more IoT devices are using AI to gather and analyze data. Estimates suggest that by 2025, IoT devices will create around 73.1 zettabytes of data. As demand for data increases, we could see more businesses adding data centers.

Bar chart showing data generated by Internet of Things devices growing 422% between 2019 and 2025

SOURCE: DataProt

As the volume of data increases, we can also expect growth in edge computing. Edge computing allows IoT devices to process data at the furthest reaches, or edge, of a business’s network. This allows organizations to improve speed, save bandwidth, and only send certain data to data centers for processing.

In 2018, Gartner predicted that by 2025, 75% of enterprise-generated data will be created outside of centralized data centers. According to MarketsandMarkets, the global edge computing market is expected to grow from $53.6 billion in 2023 to $111.3 billion in 2028 at a compound annual growth rate (CAGR) of 15.7%.

Bar chart showing the global edge computing market growing at 15.7% CAGR to $111.3 billion by 2028

Businesses should expect to pay as states implement 988 fees and prepare for Next Generation 911 upgrade

With our cell phones always at hand, it’s easy to think emergency responders can find us anytime, anywhere. But that’s not always the case.

Enter Next Generation 911 (NG911), the newest flavor of 911 service. NG911 is a digital internet protocol (IP)-based system that will replace the analog infrastructure that’s been in place for decades. It will allow 911 centers to accept text messages, images, video, and voice calls. As of 2021, the latest data available, 38 states said they’ve adopted a statewide NG911 plan.

Existing 911 services include Enhanced 911 (E911), which shows the address of a traditional wired phone line. Cell phones transmit your location using a satellite chip but the equipment needed to accept satellite information is typically found only in major cities.

Graphic showing the evolution of 911 emergency calls and E911 from landlines to cell phones to VoIP


Despite all the changes in technology, city and county ordinances governing 911 services haven’t changed much in the past 40 to 50 years. So how these laws apply to new technologies isn’t always clear. This can leave businesses wondering how to calculate accurate communications tax. States and other reporting jurisdictions collected 911 and E911 fees totaling $3.49 billion in 2021.

The Federal Communications Commission (FCC) set a July 16, 2022, deadline for telecommunications carriers and VoIP service providers to direct 988 calls and texts to suicide prevention and mental health counselors. Recently, some states have started imposing regulatory fees in connection with 988 calls and texts directed to the Suicide and Crisis Lifeline.

The new fees are likely to make an already complex landscape of communications taxes and fees even more complicated. States originally intended per-line, per-month public utility fees to be a fixed source of income. But in this day and age, defining what actually constitutes a line is fuzzy due to a myriad of new technologies. It’s also possible that states don’t yet know how much it will cost to implement 988 services. The new surcharges vary widely.

To stay compliant, businesses will need to have systems in place to handle the new fees and potentially increased volume of tax calculations and returns. If you provide VoIP services nationwide, for example, you probably file many communications tax returns that include 911 fees. With the addition of the 988 Lifeline, you’ll likely have more returns to file. Automating communications tax calculations and returns can make complying with E911 and 988 service regulations easier.

What will happen with the Federal Universal Service Fund in 2024?

At last, the FCC is whole again. The appointment of Anna Gomez as the agency’s fifth commissioner in September 2023 could be the sprocket needed to turn the wheel on net neutrality. That could set in motion overhauling the Federal Universal Service Fund (FUSF) and bring relief of a substantial charge added to phone bills.

Net neutrality is the principle that all internet data should be treated the same, without favoring or blocking certain websites, platforms, or devices. The commission is looking at whether to reclassify internet service as a Title II telecommunications service, making it an essential utility. That would give the agency control over broadband.

The FUSF was created to provide phone service to rural areas, low-income consumers, schools, libraries, and health care providers. In 2011, the FCC approved using the fund to extend broadband. Currently, internet service providers aren’t required to pay into the FUSF, but they might be in the future if internet service is reclassified as a necessary utility.

The FUSF hit a record contribution level of 34.5% during the last quarter of 2023 and pays out almost $10 billion annually.

Line chart showing the Federal Universal Service Fund contribution factor climbing to 34.6% in Q4 2023


A nonprofit consumer protection agency is challenging the FUSF subsidy program, calling it unconstitutional. AT&T CEO John Stankey also called for FUSF reform.

“Whenever the commission does make a decision on net neutrality, it will be a front-page news story. For now, hurry up and wait. The FUSF has been lurching toward collapse for about 25 years,” says Toby Bargar, Senior Tax Strategist for Avalara for Communications.

Broadband continues to dominate the internet market

More and more of us are online these days. The U.S. has one of the highest digital populations in the world, with around 311 million internet users as of January 2023. Broadband, including cable and DSL, remains the most common type of internet access in the U.S., with 37% of Americans saying they access the internet this way.

The largest cable and wireline phone providers and fixed wireless services in the U.S. added 3.5 million net broadband internet subscribers in 2022. Together, these businesses represent about 95% of the market. Fixed wireless/5G services from T-Mobile and Verizon accounted for 90% of the growth. While the pandemic saw greater volumes of new subscribers, the total number is more than any year from 2012 to 2019.

Fixed wireless internet service providers (WISPs) continue to break ground as the fastest-growing sector of the broadband industry. While more than 7 million U.S. customers receive internet via these antenna-delivered services, most WISPs are small and medium-sized businesses with an average of 1,200 customers. Many tax incentives are available for WISPs to build out their networks to rural and underserved areas, expanding the availability of affordable internet services.

Increasing numbers of WISPs are rolling out fiber. Many are motivated by federal and state government funding, while economics and consumer preference are also key drivers. However, while fixed wireless can be deployed in weeks, fiber takes considerably longer and labor shortages can add delays.

Ballooning everything as a service provokes tax questions

Businesses and consumers are more connected than ever. We communicate through video chat, SMS messaging, and services available via APIs.

“Companies use a whole suite of communications technologies to provide customer marketing and customer support,” says Steve Lacoff, General Manager of Avalara for Communications. “AI turbocharges that and makes it more effective. Businesses can use AI to mine customer data and generate strategies. It can help fuel growth. However, AI also requires companies to be responsive, keeping up with the pace at which they are communicating to their customers and vice versa.”

The proliferation of communications platform as a service (CPaaS) is a great example of this. Companies use CPaaS to send their customers appointment reminders, purchase confirmations, and order tracking notifications. B2B software-as-a-service (SaaS) providers use CPaaS to add voice calling, video chat, and messaging into their CRM and marketing automation platforms. IDC forecasts the worldwide CPaaS market to swell from $14.3 billion in 2022 to $29.7 billion in 2026 at a 15.8% CAGR.

More businesses are using application-to-person (A2P) messaging to communicate with their customers. Historically, SMS has been the preferred means for reaching a wide audience. But as more customers spend time on their cell phones, brands are embracing mobile-friendly technologies like chat apps and social media apps. Business spending on A2P messaging worldwide is predicted to grow from $32 billion in 2022 to $43 billion in 2027.

CPaaS, SaaS, and unified communications as a service (UCaaS) are among countless cloud-based technologies complicating the communications tax landscape. Together, they’re part of a huge family of technologies collectively known as everything as a service (XaaS). The global XaaS market is projected to grow from $699.79 billion in 2023 to $3.22 trillion by 2030 at a 24.4% CAGR.

Bar chart showing the global Everything as a Service market growing 24.4% from 2023 to 2030

“As these services grow, the government may conclude that internet revenues are just too significant to forgo indefinitely,” says Toby Bargar. “Could tax policy changes follow? Perhaps. Policymakers could see data as a utility.”

Streaming gives viewers an ultimatum

As streaming companies like Netflix and Disney+ adjust to declining growth, consumers are being confronted with two choices: Watch ads or pay more

Amazon announced it will introduce ads in Prime Video starting in early 2024 and will also offer a new ad-free option for $2.99 per month. HBO Max rolled out a lower-cost, ad-supported plan to subscribers in 2021 then rebranded the service as Max on May 23, 2023. Netflix and Disney+ launched ad-supported tiers in 2022.

Subscription-based streamers are having to compete with ad-based services that are free to watch, like Pluto TV and Tubi.

The new plans are resonating with many subscribers. Advertising-based video-on-demand service is the fastest-growing streaming category, adding 2.6 million subscribers during the first quarter of 2023.

Meanwhile, the cost of ad-free subscriptions is creeping up. Prices for the 10 largest streaming services increased 10% on average in 2023. Industry watchers say this is the future. One market researcher noted that “in some cases, lower-priced, ad-supported plans have a higher average revenue per user than more expensive paid ad-free plans.”

Chart showing lowest ad-free streaming prices per month for new subscribers with costs of $7 to $18 as of October 2023

“State and local governments rely on communications taxes attached to streaming revenues to line their coffers. As revenue models change, jurisdictions may have no choice but to look at taxing ads,” says Bargar.

We’ve already seen states propose legislation to impose franchise fees on streamers, as well as cities bringing lawsuits. Governments argue that because streaming companies use public facilities to deliver their services they owe franchise fees like cable providers and telecoms do. 

Despite slower growth, streaming’s share of overall TV usage in the U.S. hit an all-time high of 38.7% in July 2023.

What else could affect the communications industry in 2024?

6G and 7G are on the way

In the world of wireless, the next great thing is always on the horizon. The sixth generation of cellular networks, 6G, is expected to be available in the early 2030s. Industry experts don’t just expect 6G to be faster than 5G. They predict it will integrate deep learning, support IoT, and allow consumers to engage more fully with intelligent machines.

Graphic showing the foundations of 6G technology features and benefits

SOURCE: Ericsson

Research has already started on 7G, which offers the potential for continuous global wireless connectivity.

Continued displacement of traditional internet with wireless

Cable, satellite, and internet TV providers reported losing 2.3 million customers in the first quarter of 2023, their worst losses to date. Now there’s a new wave of cord-cutters and they’re going after internet providers.

Consumers have more options for internet service and they’re looking to save. For many, that means breaking free of cable internet. T-Mobile added 557,000 5G wireless home internet customers in the third quarter of 2023, while Verizon added 384,000 customers.

Amazon launched the first satellites for its new internet service in early October 2023. The service is expected to be available to households and businesses by the end of 2024.

New Hampshire looks to repeal communications services tax

New Hampshire Governor Chris Sununu and other lawmakers are hoping to repeal the state’s communications services tax on landline phones.

The governor said taxing people’s calls is “antiquated” and unnecessary. Supporters of repeal argue that communications tax is different from beverage alcohol tax, which acts as a check on a vice, and gas tax, which funds a government service.

New Hampshire has taxed telephone communications since 1990 and collects around $30 million annually, a number that has been trending downward.

What we’ve shared represents a small speck of what’s happening in the communications industry world but we’ll leave you here for now.

How Avalara can help

Staying on top of changing legislation and complying with communications tax requirements is easier with Avalara for Communications. Avalara provides a complete suite of solutions to handle calculations, file returns, and minimize risk for businesses in the communications industry.

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Avalara Tax Changes 2024

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