How To Qualify For Telecommunications Tax Exemptions

At TaxConnex, we work with telecommunications service providers of all sizes.  Many are existing MSPs (Managed Service Providers) or IT management companies that would like to expand their service offering and become “stickier” with their clients.

They may have infrastructure in place to support the sales tax requirements of their existing business, but the telecommunications service presents a different set of issues.

One of these issues is related to establishing the ability to purchase telecommunications services from their carriers on an exempt basis under the premise that they will be reselling the service.

Telecommunications services is one of the most highly taxed and regulated industries in the country.  In addition to the standard sales tax in some states, there could be separate communications services taxes, utility users taxes, 911 fees, and various state and federal regulatory compliance obligations.

One of the primary regulatory obligations is contributing to the USF (Universal Service Fund).

Since the service providers are in the middle of the supply chain – purchasing service from an upstream carrier and reselling the service to their customers – there’s an opportunity to exempt these purchases from taxes and fees for resale purposes.

However, the standard sales tax resale exemption is not sufficient to achieve the exemption. This is primarily because the service provider needs to exempt different taxes – not just sales tax.  They may need to exempt communications services tax, utility users tax, 911 fees, USF contributions – each potentially requiring a unique form to be completed and sent to the upstream carrier. 

Many of the state and local taxes and fees (911 charges) can be exempted as soon as a service provider provides a valid tax ID number for the tax type being exempted in the state where the service is being provided.  

Exempting the regulatory charges and the USF fee can be more challenging.   

• The USF has a de minimis category whereby a service provider is not required to contribute directly to the fund but rather the upstream carrier charges the fee and reports directly to USAC.  
• Once the USF contributions of the service provider exceed $10,000 in a 12-month period, then the service provider must contribute directly to the fund via USAC.  
• In return, the service provider can now apply for a USF exemption with the carrier.  
• The carrier is only allowed to exempt the USF fee if the service provider provides proof that they are a direct contributor to the fund. 

Due to the number of tax types and regulatory obligations, most large carriers will issue an exemption package to their resellers for completion. This can be a 40-50 page or longer document requesting different forms to be completed noting different tax and FCC filer ID numbers.  That paperwork can be overwhelming but is worth the effort to complete and/or the cost to hire an outside firm to help.  With tax rates on telecommunications services as high as 13% in some states and with the USF contribution factor up to 34.5% in Q4 2023, there is a significant savings opportunity.  

For more information about tax compliance for telecommunications companies and how TaxConnex can help, get in touch!