This article was written for the Atlanta Business Chronicle Leadership Trust. To see the original post, click here.
Taxes are an integral part of the telecom world. Taxes, fees and government surcharges on telecommunications services increased from 19.1% to 21.7% in 2019 (even as average monthly bills for consumers actually dropped).
In talking with countless telecommunications service providers about their various tax and regulatory requirements, there are some recurring themes I hear that can be troubling. These recurring issues tend to pop up with new VoIP service providers. Perhaps they’ve been in business for years previously — and they may have even had various sales tax obligations historically — but they are now offering VoIP services that expose them to a completely different set of tax and regulatory obligations.
The misconceptions I hear include:
1. VoIP is delivered over the internet and is, therefore, tax-free.
This is not true. The confusion lies with the sometimes controversial Internet Tax Freedom Act (ITFA), passed in 1998. ITFA does prohibit federal, state and local governments from taxing internet access and from imposing discriminatory internet-only taxes. There were a few states that were “grandfathered” and were allowed to charge tax on internet access; these grandfathered rules have been revoked as of July 1, 2020.
ITFA has no application to the taxability of telecommunications services. Understanding that VoIP is not tax-free, each state (and in some situations, each local jurisdiction) is able to decide whether VoIP is taxable or not. For example, California at the state level does not tax VoIP, but various cities in California apply a local utility users tax to VoIP.
2. I’m not a telecommunications service provider; I’m a reseller.
When I hear this, I believe the prospect is considering the major carriers as the service provider. If you are sending an invoice to your customer for telecommunications service, however, and the customer believes and recognizes that you are providing the service, then you may be considered a telecommunications service provider. As a telecommunications service provider, you are responsible for collecting and remitting the applicable taxes and regulatory fees.
3. I don’t have nexus, so I don’t need to collect and remit any taxes.
This comment often comes from someone experienced in the standard world of sales tax. Generally, as related to sales tax, nexus needs to be established before a company is obligated to adhere to the jurisdiction’s sales tax rules. Nexus has historically been thought of as a physical presence, but within the last two years (ever since the Supreme Court’s now-famous Wayfair decision), it has been expanded to include the idea of economic presence. If you are providing a telecom service, you could easily look to a customer in another state and conclude that you don’t have nexus in that other state and therefore are not responsible for collecting and remitting the taxes.
As a telecom service provider, however, you are using infrastructure within a state to deliver your service. This infrastructure includes cell towers, fiber, switches and so on. You may not own this infrastructure, but if it were not present, you could not deliver your service. States have concluded that the use of this infrastructure creates attributional nexus and therefore gives you the responsibility to collect the applicable taxes. Wherever you have customers, you must collect the taxes.
4. My service provider handles all of my taxes for me.
While there is an element of truth to this, it is not an effective strategy. The main factor to consider is that by providing VoIP service, you are now considered a telecom service provider. And as a service provider, you have direct responsibilities related to taxes and regulatory fees. Your upstream carrier may be charging you these various taxes and fees, but that does not relieve your responsibility.