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Telecommunications Tax Compliance – What You Need to Know
October 22nd, 2021
Tax and regulatory compliance can be a daunting task to keep up with for any business. However, this is especially true for the telecommunications industry as they have some of the most complex rules and regulations to understand. Telecom providers are subject to numerous regulatory fees and taxes, including communication services taxes, utility users’ tax, E911 fees, Federal Excise Tax, right of way fees, Universal Service Fund (USF) fees, along with many more. The total tax burden caused by these communications taxes can often exceed 30%, making the telecom industry one of the most heavily taxed industries in the United States.
Communications tax encompasses a multitude of taxes, fees, and filing requirements imposed by federal, state, and local governments. These taxes can involve multiple complex calculations and are constantly being adjusted by regulatory authorities in order to keep up with the rapid growth of the telecom industry. Since each state and local jurisdiction has its own set of rules and approaches to assessing each tax, they must be managed across local, state, and federal regulatory authorities. In addition, navigating the various jurisdictions in order to determine which communications tax should be applied can be incredibly complex as states have expanded nexus laws to collect revenue in response to the Wayfair v. South Dakota Supreme Court ruling in 2018.
With the expanded nexus laws resulting from the Wayfair v. South Dakota Supreme Court ruling, telecom service providers are required to file tax returns in jurisdictions where they have either a physical or economic presence. Unlike sales and use tax, where there are physical facilities, products, and equipment to track, telecom tax compliance is tied to invisible radio waves and digital signals. Because infrastructure within a state, such as cell towers, fiber, switches, etc., are used to deliver service, regardless of whether you own it or not, “attributional nexus” is created. In order to determine jurisdictions where there might be attributional nexus, telecom providers are required to determine and track the location of their customers. Unfortunately, because the tracking of customers, particularly with Voice over IP (VoIP) and wireless services, can be difficult, many companies may not be aware that they have nexus in a particular jurisdiction until they are audited. There is no statute of limitations, so if a company has not been filing in a state they have nexus in, they could be required to pay all prior year taxes, including penalties and interest, which can become costly.
Services Subject to Communications Tax:
Communications tax no longer applies to just traditional telecom companies that offer voice services. The rapid growth and adoption of communications-platform-as-a-service (CPaaS) solutions, which deliver communications services such as voice, videoconferencing, SMS, and wireless connectivity through application programming interfaces (APIs), have allowed communications services to be embedded in a wide range of products subject to communications tax. While it’s difficult to determine which industries are subject to communications tax, they can be categorized into three broad service types.
- Voice Service Providers: Voice includes traditional communications services typically delivered via wireless, wireline, or VoIP. Services can be found across telecom, cable, unified communications (UC), and software-as-a-solution (SaaS) companies that provide voice-related services.
- Video Service Providers: Video services cover traditional pay-tv offerings found via cable or satellite providers, as well as over-the-top (OTT) solutions, including streaming, live, and on-demand options.
- Technology Companies: Tech companies that meet requirements for communications tax include SaaS solution providers, networking companies working with circuits, VPN, or the internet, tech services offering managed services or web hosting, and hardware companies that offer services.
Other Compliance Considerations:
In addition to the industry-specific compliance items above, there is also proposed tax legislation that was released by the House Ways and Means Committee that should be factored into year-end planning. All the proposed tax legislation changes are not listed below, but one of the items that could affect the telecommunications industry the most is an increase in the corporate income tax rate.
Corporate Tax Rate:
The corporate tax rate structure would return to a graduated format under the initial proposal, effective for tax years beginning after 2021. The current flat rate of 21% would be adjusted depending on your taxable income level. An additional 3% tax would be included on the taxable income of a corporation in excess of $10,000,000. The initial proposal showed the following graduated tax brackets for C Corporations:
- Taxable Income $400,000 or less, tax rate of 18%
- Taxable Income over $400k & not over $5.0 M, tax rate of 21%
- Taxable Income over $5.0 M, tax rate of 26.5%
With the proposed tax rates increasing for tax years beginning after 2021, it may be beneficial to review pulling revenue into 2021. While this raises 2021 income, the net effect could potentially save money instead of paying it at a higher rate in a future year.
While the proposed tax legislation is still subject to change and ultimately may not end up passing through Congress, most experts agree that the rates will not be going down. In order to keep up with these proposed tax law changes, as well as the complex communications tax, it will be important to meet with your tax advisor and review any year-end strategies.
We can help! Our team of tax experts can help you understand the complexities of the telecom regulatory considerations, ensuring you make the right move for today and your financial future.