If you’re a telecommunications services company, you face greater trials than other businesses when complying with federal, state and local jurisdictions. In addition to state and local taxes, your business may also be subject to various federal and state regulatory obligations.
Federal regulatory obligations are administered through Universal Services Administrative Company (USAC) and state regulatory requirements are administered through the Public Service Commissions (PSC) or Public Utility Commissions (PUC) within each state. The primary fund administered through these groups is the Universal Service Fund (USF) but include other regulatory fees such as Telecommunications Relay Services (TRS), certain 911 fees, and others.
Taxes are administered by the state Departments of Revenue (DOR) and local jurisdictions. These taxes go by a variety of names such as sales tax, communications services tax, utility users tax, local license tax, 911 fees, etc.
In the non-telecom world, a company would have to have either a physical presence or an economic presence in order to be required to collect these various taxes. However, in the telecom world, by default a company is required to collect and remit these taxes wherever they have customers. The states’ position is that a company is unable to deliver their telecom service without taking advantage of various infrastructure in the state including switches, towers, fibers, etc. This infrastructure creates “attributional nexus” for the company, regardless of whether the company owns this infrastructure or not. This is a widely accepted position as it has been upheld in the courts.
The requirement to collect and remit taxes wherever a company has customers, and the additional regulatory burdens makes the tax and regulatory compliance process extremely complex for companies. The remainder of this blog will discuss the various tax requirements for a telecom company.
Rich revenue sources
In most states, sales tax applies to telecommunications services. In addition, local jurisdictions have numerous compliance obligations associated with providing telecom services.
States where the telecom service is not subject to sales tax often have a specialty telecom excise tax. Florida for example, has a communications service tax that is inclusive of the state sales tax and a communications-specific tax that applies to telecom. The Florida CST can be up to 15 percent, so it can be a rich revenue source for jurisdictions.
In California, sales tax doesn’t apply to telecommunications services, but there are numerous cities and counties that apply a municipal utility tax of 2.5 to 7 percent. Missouri has local license taxes in most cities. Texas applies a Right of Way fee (ROW) to major telecommunications services including VoIP in almost 1,000 local jurisdictions. An E911 fee is also imposed by many local jurisdictions and some states, and it could result in you having thousands of filings across the country.
Five states also impose a gross receipts tax specifically on telecommunications services: Pennsylvania has a 5-percent gross receipts tax, for instance; Maryland is 2-percent and New York is 2.5-percent. These are annual corporate-type taxes, many times requiring an estimated payment like a corporate income tax.
Why telecoms need to get taxes right
Many of these taxes are “trust fund taxes.” You, the telecom provider, are a collection agent for the state with responsibility to collect and remit these taxes for the state.
This tax system puts an onus on telecom companies, because failure to get it right means the jurisdictions are going to come to you for any deficiencies in the tax assessment.
How to calculate taxes
To determine the applicability of taxes, first look at your exact services. Are you a VoIP provider? A traditional landline provider of long distance? Do you provide a single service or multiple services? Do you invoice pre-paid or post-paid? Are the invoices recurring month to month or are they different every month?
What you use to set up your tax calculation depends on volume and the type of customer base you have. Most of the time, your customer’s billing address determines what taxes you apply to their bill. Depending on the type of service provided, you may also need to consider the origination and termination point of each call. The more complex your service offering and the more geographically disperse your customer base is, the more likely you will need a telecom specific tax and regulatory fee calculation software. Other telecom companies with a static group of customers centralized in one or two states can successfully set up a taxability matrix for that customer base and maintain it fairly easily.
TaxConnex has worked to assist telecom companies alleviate the burden of sales tax for many years. We are experts when it comes to navigating the taxes associated with communication companies and have a partnership with Inteserra to fill in the gaps on regulatory fees. Contact us to stay on top of this ever-changing environment.
Want to learn more about taxes and regulatory fees assigned to telecom companies? Watch our replay from our webinar with Inteserra!