Sales Tax Nexus for VoIP Service Providers

At least once each week a VoIP service provider asks me about sales tax nexus creating activities for their business.  (For purposes of our discussion sales tax nexus refers to transaction tax nexus including sales and telecommunications taxes.)  

The VoIP providers believe that they only have nexus where they have physical offices or personnel.  Since a lot of these businesses are start-up entities, that usually means a single office with a few employees in one state. 

They think everything is easy related to sales and telecomm tax…they only have to worry about the one state where they have an office and employees.  This is generally a reasonable approach for most industries but the telecommunications industry is a bit different. 

The de facto standard is that where a telecomm provider has customers is where they have nexus.  The idea is that the telecomm provider is utilizing the infrastructure (cabling, switching, networks, etc.) present in the state. 

The infrastructure creates the market for the telecomm provider to conduct business in the state and therefore creates the physical connection to the state.  Most of the VoIP providers shut down when they hear this as their customer base often spans multiple states thus significantly increasing their tax compliance burden.

What I have to tell them is that sales and telecomm tax is not meant to be a charge on the service provider.  It’s meant to be a charge on the consumer of the service.  Because of this, they are better off collecting and remitting the tax now rather than hoping they never get identified in an audit or waiting until the business has expanded and they have accrued a material tax liability that could shut down their business.

I’d like to see more service providers ask which states subject the VoIP service to a telecommunications tax versus a sales tax.  I’d also be encouraged if they asked how to establish a process to maintain compliance – that is the collection and remittance process.