Many companies that provide telecom services are overwhelmed by onerous, constantly shifting sales and telecom tax regulations. The communications industry is one of the most taxed and regulated industries of them all. TaxConnex can help your company fully comply with all sales and telecom tax obligations while taking your efficiency to the next level.

In addition to telecom taxes, there are also various regulatory fees that communications companies have to navigate.

The most common regulatory fee is the USF (Universal Service Fund) which is administered by USAC (Universal Service Administrative Company). The USF fee is calculated by applying a contribution factor to the assessable revenue. This contribution factor changes quarterly and has been ranging between 25% and 30% over the most recent quarters. This contribution factor should be charged against assessable revenue only. Several other federal programs are funded through contributions assessed against certain revenue.

Telecommunications services can easily carry a total tax burden of 30% or more when considering sales tax, communications services tax, E911 fees, utility users’ tax, Federal Excise Tax, right of way fees, USF and more.

One of the key factors to understand what taxes are applicable is to consider where a telecommunications service provider has nexus. For traditional businesses selling tangible personal property, nexus has historically been determined by where a company has a physical presence and most recently the addition of where a company has an economic presence as well. For telecommunications service providers, the nexus analysis is generally much easier. States tend to take the position that wherever a telecom provider has clients, they have nexus. This is a result of a concept referred to as attributional nexus that gives a telecom provider a physical presence by virtue of leveraging the infrastructure within a state including switches, fiber, towers, etc. – even if the telecom provider does not own this infrastructure. The theory is that the telecom provider could not deliver their service without the use of this infrastructure which therefore establishes a physical presence.

Traditionally, telecom services were simple to identify and consists solely of voice services. POTS was the primary, if not sole telecom service historically. POTS stands for Plain Old Telephone Service and is essentially an analog voice transmission implemented over copper wire. However, new services have emerged over the last 25+ years including a dramatic shift to VoIP service. Additional telecom-related services have emerged including broadband access, private line service, data-only services, satellite communications, wireless, etc. Within the last ten years, there has been further integration between software and telecom services often blurring the boundary of what the service actually represents. One example is video conferencing services which have become more mainstream, especially due to the pandemic and has added to the complexity. Each of these services can have a different tax and regulatory treatment from state to state.

Let’s first take a look at how Massachusetts taxes various telecommunications services. In Massachusetts, telecom services are subject to the state sales tax rate of 6.25 percent sales tax. Massachusetts treats the question of telecom sales tax very broadly, so there are dozens of categories covered by their laws. The following telephone services are taxed:

• Voice and non-voice phone services
• Telegraph
• Beeper/Paging
• Fax Services
• Cellular/Mobile Phones

In addition to the state-level sales tax, Massachusetts also applies a state-level 911 fee – each of which requires a separate return to be filed. This is one of the easier states in terms of the variety of tax types and the number of returns that are required to be filed.

An additional example is California that does not tax telecommunications services. On the surface this sounds great; however, the complicating factor is that multiple cities and counties in the state have their own local utility users’ tax that could require 100s of local returns to be filed each month.

• Location of Customers: A key factor to determine the correct taxes to apply is based on the situs of individual transactions. Situs is a specific term that is used to identify the location in which tax applies. The complication with telecommunications services is that users can be spread out. For example, if you provide a VoIP solution to a company with headquarters in Dallas, Texas you may decide to use Dallas as the situs to determine the applicable taxes. However, this customer could have users in offices scattered over the country. The tax should apply where the benefit of service is received, or “the primary place of use”, and thus you are required to apply tax based on where the users are located. This can significantly complicate the process of charging sales tax.
  
  Wireless providers also struggle with situsing phone calls. Historically, wireless providers followed a Supreme Court decision in Goldberg vs. Sweet which governed the question of which jurisdiction has authority to tax all interstate calls. Under the Goldberg rule – also known as the “two-out-of-three rule” - a jurisdiction could impose a tax on a call if the call either originated or terminated in the jurisdiction and the call was changed to a “service address'' in that jurisdiction. Consequently, two of the three touchpoints for a call (i.e., origination, termination, bill to address) had to occur in the same jurisdiction to make the telecommunications transaction subject to tax.
  
  Now wireless providers follow the Mobile Telecommunications Sourcing Act (MTSA). The MTSA states that a customer's home service provider will be subject to the state's sales and use tax regardless of where transmissions originate or terminate within the home service provider's licensed service area. This Act determines that mobile communications services are taxable at the location of the customer's "primary place of use". This is the residentail or business address of the customer, which must be located within the service provider's licensed service area.  

When it comes time to calculate your telecom taxes, you will likely find it challenging. The various taxes and regulatory fees create a complicated patchwork that you must follow to be compliant with the law. Depending on the number of jurisdictions in which you have clients, it will be almost a necessity to implement a telecom-specific tax calculation solution to determine the applicable taxes and fees to include on your invoices.

These calculation solutions integrate with your billing platform to ensure the proper taxes and fees are invoiced. The billing platform will share certain pieces of information with the calculation solution including the service type, situs, sales amount, etc. Based on this information, the calculation solution will determine the applicable taxes and regulatory fees and pass these back to the billing platform to add to each invoice.

If invoicing the correct taxes is not enough, you must also file and remit potentially 100s or 1,000s of tax returns depending on where you have customers. Some of the more burdensome states in terms of the sheer volume of returns include California, Colorado, Georgia, Illinois, Louisiana, Missouri, New York, Texas, Virginia and Washington. Each of these states could require 150 or more tax or 911 returns to be remitted depending on where you have customers and the type of service you provide.

Many telecommunications services providers choose to outsource the filing process due to the large number of returns. If you decide to look at outsourcing as an option, consider the following:

• Does the outsourcing company have a demonstrated track record in the telecommunications industry?
• Are they able to work with your source data from your calculation solution and billing system?
• How long have they been serving telecommunications companies?

Other general factors to consider include:

• How do they process payments? (Is it in-house or via a 3^rd-party that you will need to work with as well?)
• Do you have a dedicated point of contact or an 800-number when questions pop up?

It’s always a good idea to speak with a couple of current customers as well to make sure all of your questions and concerns are answered.

If you are struggling with the implications of telecom tax, you may want to consider a dedicated telecom taxation service provider like TaxConnex. TaxConnex has years of experience managing state and local telecom taxation laws and can apply them to your exclusive situation.