Is your client on the hook for communications tax?
When people think of communications tax, thoughts often run to the long list of taxes and fees on their wireless or cable bill that always seem to make the total more than expected.
In reality, these bills show a consolidated view of taxes and fees — the actual list is much longer. What many businesses don’t realize is that communications tax applies to much more than just the wireless and cable industries. If your client is providing any service with voice, video or connectivity, there is a good chance they may be on the hook for communications tax.
Today, when a business evaluates offering a new service that has these capabilities, including for the growing internet of things (IoT) market, accountants must also determine if there will be a communications tax liability. As we covered in the first article in this series, "Why are communications taxes so complex?," this can be a very difficult task for those who are not extremely well-versed in the nuances of communications taxation. In this article, I’ll break down the four primary categories of products or services you should keep an eye out for, as well as some key industries and product types that might give you a hint.
Identifying communications tax red flags
There is a likelihood that a product is communications taxable if it includes voice, video or connectivity capabilities, including IoT. It can be either a standalone offering or a service or a platform that embeds one of these capabilities. As you examine a product in more detail, always look for some key red flags indicating it might have communications tax liability:
1. Voice: Voice communications have the strongest potential for communications taxability. This is not limited to traditional wireline and wireless calls. Some — but not all — VoIP applications, as well as software applications with an embedded voice support feature, can also be communications taxable.
Another often-overlooked category is managed service providers or value-added resellers that include voice or other communications services in their portfolio offerings. Simple add-ons like reselling phone services can trigger a communications tax responsibility.
In any of these cases, it is important never to assume communications taxability. Accounting professionals need to carefully assess each situation for specific rules by product, bundle and jurisdiction.
2. Digital content: Digital video and audio content, whether streamed or downloaded, is one of today’s most diverse communications tax scenarios. It’s a rapidly growing and changing market as we become a nation of cord-cutters, leading to intense competition with major industry players in cable, content, and wireless. In the U.S., the number of digital video viewers is projected to surpass 236 million by 2020, and the global video streaming market is expected to be worth more than $125 billion by 2025.
Because digital content strategies typically combine many different product types into complex, frequently changing bundles with highly varied and changing tax rules, accountants who are new to communications tax often find it difficult to keep up. If your client is offering these services, you should consult an expert in this space.
3. Connectivity: Any company offering connectivity services, such as internet, VPN and software-defined wide area networks (SD-WANs), may have communications tax responsibility. This is another often-overlooked area of communications tax as data centers, MSPs and system integrators frequently don’t realize there may be more than sales and use tax responsibility in many states.
With the predicted explosive growth of 5G-powered IoT and edge computing, the number of MSPs and SIs potentially offering or bundling connectivity services could grow exponentially. It’s critical for accountants to understand where communications tax responsibility lies within their client’s supply chain.
4. IoT and connected devices: IoT applications use sensors attached to devices to collect and analyze millions of points of information to gain a seemingly unlimited range of insights. Whether they’re tracking the smallest internal status and movements of an individual cow or the entire herd, the daily needs and machinations of your home appliances, or complex logistics for the largest global ports and traffic systems, IoT devices and the sensors that power them collect and transmit enormous volumes of data.
And it is that transmission that in many cases could be communications taxable. Many of these use cases are B2B-related, but not always. This determination is challenging and technical.
My business or client might be on the hook — now what?
From traditional telecom providers to software providers and even tractor manufacturers, as today’s companies mature and diversify, they often look to add new services. If these new services include any form of communication, it’s essential to understand whether or not communications tax will be required. It’s a complex web of tax rules and regulations to untangle. If you are new to communications taxation or just feel unsure, the best advice is always to get help from a communications tax or regulatory expert. It is far better to assess a product or service and exclude taxability than to ignore the consideration and miss the responsibility, which can result in a significant financial hit and frustrated customers.
Once you know for sure, you can take the necessary steps to prepare. From technology systems and setup to compliance and regulatory expertise — getting a firm foundation will help minimize risk and likely save countless headaches.