Telecommunications companies face tougher problems than most other businesses when trying to comply with federal, state and local tax and regulatory obligations.
Most of the taxes that telecom companies contend with are administered by the individual states’ Departments of Revenue (DOR) and local jurisdictions. These taxes go by various names: sales tax, communications services tax, utility users’ tax, local license tax and so on.
Among additional layers, federal regulatory obligations are administered by the Universal Services Administrative Company (USAC) and state regulatory requirements are managed by the Public Service Commissions or Public Utility Commissions in each state. The Universal Service Fund (USF) administered by USAC is the single, largest “tax” burden on telecom companies with a contribution factor that hovers around 30% of assessable revenue.
If it sounds confusing, it is – and telecom providers often rely on hearsay and outright myths when trying to meet their tax and regulatory obligations.
When and how did it get this complicated?
The new infrastructure
In the non-telecom world, a company must have either a physical presence or an economic presence to be required to collect the various, applicable taxes Telecom companies are a bit different. Telecom companies are generally assumed to have nexus wherever they have customers. Why? The states’ position is that a company is unable to deliver telecom service without using infrastructure in the state: switches, towers, fibers and so on. This infrastructure creates “attributional nexus” for the company whether the company owns this infrastructure or not. (This widely accepted position is often upheld in court.)
The requirement to collect and remit taxes wherever a company has customers makes the tax and regulatory compliance process extremely complex for companies.
Rich revenue sources
Focusing specifically on a telecom company’s transactions tax requirements, sales tax applies to telecommunications services in many states. 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.
Florida, for instance, has a two-part communications service tax inclusive of sales tax that can exceed 13%. California sales tax doesn’t apply to telecommunications services but many cities and counties in the state can apply a Utility User Tax of up to 11%. Ditto Missouri’s telecommunication business license tax.
Texas has a Municipal Franchise Fee – and an occasionally stormy history with telecom from the early days of the industry. Other states impose a gross receipts tax specifically on telecom: 5% in Pennsylvania, for instance, and 2% in Maryland and potentially more than 3% in New York (depending on the location of the customer). An E911 fee is also imposed by many local jurisdictions and some states – which could result in you having thousands of filings across the country.
Telecoms need to get taxes right
To determine taxes and regulatory fees that apply to your business, 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.
The exposure for non-compliance is substantial for telecom companies when you look at combined tax rates of over 30%. Additionally, regulatory authorities can 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.
As you look ahead to invoicing your customers, you’ll almost always require tax calculation software to apply the correct taxes and fees to your invoices. This tax calculation software is often bundled with the billing software and does not always involve a separate purchase or integration.
Telecom service providers should also consider the potential to exempt many of their purchases from the various tax and regulatory fees. However, a standard sales tax resale exemption will not be sufficient enough to achieve the exemption across all of the various tax types and regulatory fees. Separate exemption certificates and registrations will be required to fully exempt your purchases.
For more information about tax compliance for telecommunications companies, download our eBook, Ten Steps to Telecom Tax Compliance.
TaxConnex is an expert when it comes to navigating the taxes associated with telecommunication and VoIP companies. Contact us to stay on top of this ever-changing environment.