Streaming and Collaboration Platforms Can Face Unexpected Communications Taxes

Suddenly, important sales and revenue goals are complicated by unanticipated audit risks — not to mention once-happy customers who are about to become disgruntled when they see their monthly bills go up.

Unfortunately, this scenario is all too common. Many companies remain unaware they fall into the category of communications for tax purposes, and the impacts can be severe. At a time when numerous state and local governments are making frequent updates, it’s important for businesses to routinely evaluate communications tax collection and remittance obligations.

Let’s take a closer look at why this is the case — and what you can do to ensure your company remains compliant as your customer base grows.

What makes a company liable for communications tax?

The first question to answer is: Why would your company be on the hook for communications taxes, regulatory fees, and surcharges? The answer lies in one word: connectivity.

We live in an increasingly connected world, where companies are innovating at lightning speed to meet demand for connected products and services — and to beat the competition. From videoconferencing and collaboration platforms to new types of streaming and IoT, a growing array of technologies are taking up more and more of the communications market.

Often, these new solutions take the place of traditional voice and video.

For perspective, we all know that landlines are frequently abandoned in favor of smartphones and that cable subscriptions are being traded for streaming subscriptions. But adoption of new technologies doesn’t end there. As more people work and learn from home, for instance, Communications Platform as a Service (CPaaS) is being used to deliver voice, video, SMS, and even wireless connectivity, often all in one solution. Fitness equipment is now embedded with devices to enable streaming subscriptions, and farming equipment contains IoT sensors for real-time data on temperatures, soil conditions, weather patterns, and more.

And that’s just for starters.

As companies continue to merge, partner, and launch new offerings, the market continues to swell. Cloud services, SaaS platforms, managed services, SDN, hosting, IoT, and more are all being adopted at a rapid pace. And they’re catching the attention of tax authorities.

Gone are the days when state and local governments could rely on traditional wireline, wireless, and even VoIP providers for revenue. Consumers are foregoing many of these traditional voice services in favor of new technologies, many of which fall outside existing communications tax and regulatory fee guidance.

As some industry segments are waning and others are thriving, jurisdictions are still looking for ways to catch up to the latter as sources of revenue — either by introducing new tax laws or applying existing requirements to new products and services.

These changes are causing a broad range of companies that once paid sales taxes alone to be suddenly responsible for a more complex array of communications taxes, too.

When will your offerings be subject to communications tax?

If you work in any of the industries mentioned above, there’s a chance your products or services may already be liable for some communications tax. If not, they could be very soon.

Generally speaking, if your product has any ability for voice, video, SMS, or data connectivity, you should be watching developments closely. The reason? State, local, and municipal governments often impose new communications taxes and fees. So even if you don’t have obligations in a particular jurisdiction today, there’s always the possibility you’ll need to collect and remit tomorrow.

It’s also important to remember a company can become liable for communications tax when it uses certain words to market products, merges with another business, or packages different products into bundles.

In fact, embedding just one communications service into a solution can make the entire product subject to regulatory fees and charges. From voice calling integrated with CRM to video chat made available within a marketing automation platform, plus many other add-ons and offerings, just one addition can cause the company to become subject to a wide range of communications taxes.

What should you do next?

First and foremost, it’s critical to gain a strong understanding of where your company currently stands. Should you be collecting communications tax on existing services? Could future product launches put you at risk? When in doubt, seek guidance from a trusted advisor with expertise in this area.

Once your footing is secure, the next step is to get prepared. There are 60,000 communications taxing jurisdictions in North America that need to be continuously researched for regular updates. And the breadth of technologies that require communications tax is constantly in flux.

However, if you haven’t yet started down the path of communications tax preparedness, don’t panic. There is a way to get (and stay) ahead. With the right technology in place, staying up to date on the latest requirements can become relatively seamless.

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Toby Bargar is an attorney and senior tax consultant in the Avalara Communications business unit. He regularly speaks about and advises customers on complex transaction tax issues, particularly in the field of communications tax and regulatory surcharges.