VoIP Taxes for VoIP Start-Ups

If you’re in the process of launching a VoIP service, the tax and regulatory compliance requirements can be daunting. There’s a myriad of VoIP taxes and fees across the country. You may be curious as to the distinction between taxes and fees in this context. I describe the telecom taxes as those taxes administered by the state Departments of Revenue and local jurisdictions.  

These taxes include sales tax, communications services tax, business + occupation tax, utility users tax, and gross receipts tax.  Fees are administered by USAC at the Federal level and by the Public Utility or Public Service Commissions at the state level.  911 fees are a hybrid tax/fee and are administered at a state and local level.

How do these taxes and fees apply to VoIP providers? Generally speaking, VoIP service is taxed similar to traditional telecommunications services; however, it is regulated much different than a traditional local or long distance telecommunications service. More specifically, there are far fewer states that regulate VoIP service as compared to traditional telecommunications service. (But watch out because this is changing.)

So how do you keep everything straight? Depending on the footprint of your customer base, managing these VoIP taxes (which are really just sales or telecommunications taxes) and regulatory fees can take a variety of shapes. VoIP providers operating in an isolated geographic footprint may be able to manage the application and calculation of taxes and fees on a manual basis. Expanding into additional geographies complicates the process and often requires the use of a calculation tool that’s delivered in a software-as-a-service model or a bolt-on piece of software attached to the billing system. These calculation systems apply the complex tax and regulatory rules to each individual line item on an invoice based on certain criteria such as a service/product code and bill-to address for the customer. The tax and fee data is aggregated on a monthly basis and can then be used to prepare and remit the various tax returns and regulatory reports.

The real dilemma is when does a company implement a process like this? If you’re a VoIP provider just starting out, you likely have minimal dollars to invest in a calculation and compliance system.  So what do you do? Do you not charge any tax and assume your risk is mitigated by the fact you are paying the VoIP taxes and fees to your upstream carrier? Do you buy a tax and fee calculation tool/system and wait to accrue a certain amount of tax before you start remitting? Do you pick a flat rate to bill your customers for “taxes and fees”? These are the questions that each company must walk through and often expert tax advice and/or legal counsel is necessary to choose the right path.