Avalara Tax Changes 2023

Communications tax changes

Avalara Tax Changes 2023

Communications tax changes

Communications

Amid the headwinds of innovation, the communications industry continues to experience a tempest of tax changes. New revenue models for streaming, massive growth for communications platform as a service (CPaaS), and the spread of satellite and fixed wireless internet service providers (WISPs) are in the air.

SOURCE: WISPA

SOURCE: Nielsen

SOURCE: Juniper Research

SOURCE: Forbes

Will the rise of ad-based streaming lead to new state taxes?

For some time, streaming companies such as Netflix, Hulu, and Prime Video have been able to kick back and reap revenues from a growing collective of cord-cutters. Nearly half of U.S. households don’t access cable, satellite, or traditional paid TV. Streaming viewership surpassed cable TV for the first time in July 2022.  

However, the rate of growth for subscription-based streaming services is slowing. That has streaming companies turning their attention to new revenue models, including ad-supported content. And wherever there’s a new pot of money, you’ll find state and local tax jurisdictions that want a cut. 

Netflix and Disney+ announced in 2022 their intentions to roll out multiple pricing tiers with lower-cost, ad-supported plans. The companies hope to appeal to consumers looking to save because of concerns about the economy. In addition, they’re vying for the attention of viewers who have more entertainment choices. Ad-supported streaming services that are free to watch have surged, and in-person events that were unavailable during the pandemic have returned.

Free and cheaper services mean shrinking tax revenues for jurisdictions already struggling to keep up with the shift from cable to streaming. States looking to recoup their losses have been watching to see what happens with Maryland’s digital advertising tax (the first in the nation), which took effect January 2022. They now know, sort of: In October 2022, the Circuit Court for Anne Arundel County ruled the law unconstitutional; the state is appealing the decision. See the sales tax section for more details.

Despite all the hullabaloo over Maryland’s digital ad tax, jurisdictions realize they have to follow the dollars. With industry trends pointing to additional ad-supported streaming, states can’t afford to ignore taxing ads. 

At the same time, expect to see further consolidation among streaming providers in 2023. Discovery and WarnerMedia completed their merger in 2022, marrying the owners of Discovery+ and HBO Max. But it’s not just the heavyweights banding together. As more small businesses are launching niche platforms aimed at specialized audiences, larger companies are buying them up. Eventually, viewers will be able to get more of the content they want from a single platform.

SOURCE: The Motley Fool

SOURCE: Statista

Communications platform as a service snowballs

Businesses are turning to communications platform as a service (CPaaS) at the speed of a bullet train. According to Gartner, 95% of global enterprises will adopt API-enabled CPaaS solutions by 2025. Experts valued the industry at more than $10 billion in 2022 and predict it will generate $34 billion in sales by 2026, making CPaaS one of the fastest-growing telecom sectors.  

Companies use CPaaS to send customers text and voice messages including appointment reminders, purchase confirmations, and order tracking. B2B SaaS providers use CPaaS to add voice calling and video chat into their CRM and marketing automation platforms. As more people work and learn from home, CPaaS is being used to deliver videoconferencing and wireless connectivity. Often, all these technologies are available in a single solution.

SOURCE: Forbes

Big players in the field include Twilio and Bandwidth. Google, Uber, and Zoom use Bandwidth to embed services into their software and applications. Twilio’s customers include Airbnb, Coca-Cola, and Dell. 

Plenty of startups also rely on CPaaS companies to add voice, messaging, and video to applications they create or host. 

By using CPaaS, organizations may be liable for a wide array of communications taxes. If you use CPaaS now or plan to integrate it into future products, it’s crucial to understand the impact on your compliance obligations so you can take steps to reduce risk.

Satellite and fixed wireless internet service providers drive more pervasive connectivity

Once primarily used on cruise ships and by backpackers hiking in the woods, satellite is becoming more mainstream. Not only are satellite services within reach for more consumers, thanks to innovation they’re also becoming more exciting.  

SpaceX reportedly has long-term plans to develop and deploy broadband satellite to serve Mars. The company’s Starlink service currently provides internet access to more than 500,000 subscribers on Earth, mostly in rural and remote places — which may feel like another planet when you’re trying to get a signal.  

T-Mobile announced it’s teaming up with Starlink to enable customers to send messages from dead zones by 2023. The latest iPhones from Apple can already send messages via satellite in emergency situations thanks to the company’s partnership with Globalstar

Satellite-powered Wi-Fi on airplanes makes flying more enjoyable for passengers, while the flight crew stays on course thanks to GPS navigation. Expect to see more advancements in satellite for aviation, as well as renewed controversy over the use of mobile phones during flight.

Although the continued spread of satellite will allow more people to connect when they’re out and about, for those of us who live in urban areas, it’s unlikely to change the connections we rely on at home. In this way, satellite differs from fixed wireless internet service providers (WISPs), which are breaking 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. As the category continues to grow, we’ll likely see WISPs both complement and compete with other technologies.

SOURCE: Tech Times

Other issues likely to affect the communications industry in 2023

988 Suicide and Crisis Lifeline opens door to new state regulatory fees

As of July 16, 2022, telecommunications carriers and interconnected VoIP service providers in the U.S. and its major territories are required to direct 988 calls and texts to the Suicide and Crisis Lifeline. The Federal Communications Commission authorized the three-digit dialing code in 2020 to connect those in crisis with suicide prevention and mental health counselors. In doing so, federal authorities made it possible for states to collect regulatory fees, similar to the method used to finance 911 and poison control.

The new regulatory 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 these days, defining what actually constitutes a line is fuzzy due to a myriad of new technologies. 

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 returns for 911 fees. With the addition of 988, you’ll likely have more returns to file.

As new technologies are developed, compliance complexity will increase

Communications technologies have evolved way past traditional voice and cable. New technologies are being rolled into more and more products and services to enhance entertainment, productivity, cloud computing, and networking. As companies seek to keep pace with innovation, they make way for increased regulatory enforcement and may become responsible for communications taxes. For example, more businesses will become liable for communications taxes in 2023 due to the proliferation of CPaaS into devices and platforms.

Nothing about the communications industry is static and there’s a likelihood we’ll see developments next year and beyond that we can’t predict. 

Stay tuned. We’ll share more insights in our upcoming comprehensive communications industry report coming your way in 2023.


Avalara Tax Changes 2023

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