Are You Ready for Next-Gen Communications Taxation?

Unified communications, VoIP, SaaS, PaaS, OTT, managed services, co-location...

These and other next-gen communications services are altering entire business models and forever transforming how we work and live. As game-changing technologies are introduced and adopted at a lightening-fast pace, one of the biggest potential ramifications continues to fly under the radar each year:

Taxation.

How should states respond to this year's innovations? What will federal agencies regulate next? Which taxes and fees will be applied, and when? Governing bodies are asking these questions and many others like them, and so should communications service providers.

Next-Gen Communications Taxation Challenges
In jurisdictions across America, taxing authorities are working to determine what constitutes a communications service and how to apply taxes accordingly. Just as the taxation of VoIP and OTT was uncertain a few years ago, the same is now true for next generation communication technologies coming down the pipeline. As the user base for unified communications services like video conferencing and open-source software grows daily, states want to ensure they're receiving their fair shares of revenues.

For an example of why this is so important, consider all the complex taxation questions that can arise from a seemingly simple streaming subscription:

Streaming: As a service, streaming is taxed where it's used. But what happens when the user streams a podcast during a work commute across state lines? How will it be taxed when fees are charged per use instead of a monthly subscription?

Web and Video Conferencing: In many states, video conferencing qualifies as a taxable telecommunications service with certain taxes applied based on the location of the originating user. Should the federal Universal Service Fund contribution also be applied? If so, how will that be impacted when the video conferencing is part of a bundled services subscription?

SaaS Services: Should nexus be used to determine taxes on "intangible" software subscriptions accessed through web browsers? Or does the way the software is being used help determine if it's a taxable product?

These are the kinds of questions jurisdictions are seeking to answer as they become more in-tune with the nature of today's advanced communications technologies.

CSPs that devote minimal time and attention to considering the potential tax implications of developing technologies could be in for a rude awakening as the line separating products and services blurs.

Preparing for Pending Tax Implications
CSPs have historically specialized in service-based solutions, which are taxed one way. They've often also provided products, which are taxed a different way. What happens, then, when a product is also a service? As states address the complications created by cloud services, SaaS and the like, tax calculations and compliance requirements become incredibly complex. And if a service is deemed to be a communications service—the kind that could be regulated like a public necessity—suddenly issues like tax on tax calculation of fees and surcharges come into play too.

Providers need to be aware of the paradigm shift that's occurring in how these things are taxed—and start preparing today for the tax implications that are likely to be in effect tomorrow. With so much focus on innovation and adoption, it's time to turn conversations toward the tax implications of next-gen communication services before they go to market.

This tax-first perspective has the potential to save CSPs from a lot of unnecessary headaches. For example, how often has a marketing team promoted an exciting new offering...only to discover later that the tax department was not yet prepared to take on the corresponding regulations, rates and requirements as they evolve? Or that the product team wasn't fully aware of how much extra cost would be incurred by the customer as a result of taxation?

Keeping Pace with Constant Change
Few industries are evolving as rapidly as communications. Technology that was considered science fiction not long ago (remember Back to the Future?) is fast becoming a core component of day-to-day communications. In the midst of this constant change, we need to stop asking "if" taxing jurisdictions will account for these innovations and start considering "how" they'll do it.

While private letter rulings (PLRs) provide some guidance on forthcoming communications taxability issues, relying on this process alone can mean missing out on important changes occurring across thousands of jurisdictions. A company or consultant specializing in taxation of unified communications and next-gen technologies can help reduce the risk of missing important rules and rates as they change.

At Avalara, our communication specialists are constantly researching the latest tax implications of these emerging technologies and services. For the latest news and tools that can be used to streamline the tax calculation and compliance processes, visit our communications tax resource hub.