Earlier this week I talked with a firm that audits telecommunications bills looking for over charges on the invoices from the service providers to the customer.  We lamented the fact that we never see telecom service providers apply the same taxes and fees to services especially related to VoIP taxes and fees.  Why is this?

The technology behind VoIP communication was invented in 1995 and introduced commercially in 1998.  So from a technology perspective, this is not something that’s considered “new”.  However, the wheels of government often grind slowly and it has taken awhile to introduce legislation that applies to VoIP.

For companies deciding how tax and regulatory laws apply to their business, they are left to make decisions that if they are too aggressive (that is they don’t believe their service should be taxed or regulated) expose themselves to risk and if too conservative (that is they tax and regulate everything) they could price themselves out of the market from a competitive perspective.

A specific discussion on the regulatory treatment is best left to an attorney.  Are there any out there that care to weigh in?  But from a tax treatment perspective, the picture is clearer.  From a tax perspective, VoIP service is generally taxed as a traditional telecommunications service.  However, this doesn’t necessarily make the determination of VoIP taxes that much easier as each state taxes telecommunications services a bit different.  Let’s look at Interconnected VoIP (I-VoIP) as an example.  California, at the state level, does not tax I-VoIP; however, many California cities tax I-VoIP as a utility and apply a Utility Users Tax.  As another example, Florida doesn’t subject I-VoIP to a sales tax but a separate Communications Services Tax does apply.  Still other states apply either a sales tax only to I-VoIP or a combination of a sales tax and a communications services tax.  While this may sound confusing, if you know where to look and/or have been around the block a few times, you can get to the right answer.

Getting everyone to apply these same tax treatments is a different story though.  There will always be companies that fly under the radar of jurisdictions and take an aggressive position by not applying these VoIP taxes.  Eventually, this will catch up to most companies either through an audit or it will be identified during due diligence associated with an acquisition.  VoIP taxes is definitely a “you can pay me now or you can pay me later” situation.

Brian Greer

Written by Brian Greer