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.
Most 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, etc.
In the non-telecom world, a company would need 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, a company is required to collect and remit these taxes wherever they have customers by default. 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 many states, sales tax applies to telecommunications services. In addition, local jurisdictions have numerous compliance obligations associated with providing telecom services. The type of telecommunications service you provide (VoIP, wireless, wireline, etc.) will dictate which taxes and fees apply to your business.
Some states have communications-specific taxes such as Florida whose communications service tax 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) in 100’s of 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.
Other 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
The exposure for non-compliance is substantial for telecom companies when you look at combined tax rates of over 30%. Additionally, regulatory authorities have the ability to severely limit your company’s ability to continue providing services if you are found to be out of compliance. This can come in the form of revoking your regulatory license or preventing you from accessing and selling phone numbers.
Getting telecom taxes right
To determine the applicability of taxes and regulatory fees to your business you must first determine the type of telecommunications company you are. Are you a VoIP provider? A traditional landline provider of long distance? A wireless provider? Based on this categorization, there will be specific registration requirements at the state and federal level.
As you look ahead to invoicing your customers, telecommunications companies will almost always require tax calculation software to apply the correct taxes and fees to their invoices. This tax calculation software is often bundled with the billing software and does not always involve a separate purchase or integration. Certain situations may avail themselves to not needing the tax calculation software – for example, companies operating in a very limited geographic area or companies with a static customer base whose invoices are the same month over month.
TaxConnex has worked to assist telecom companies alleviate the burden of telecom tax for many years. We are experts when it comes to navigating the taxes associated with telecommunication and VoIP companies. Contact us to stay on top of this ever-changing environment.