When you take a moment to consider everything that is changed in recent years, it is astounding to think just how drastically the communications industry has been reshaped.
From the slow death of wireline to fast-fading traditional voice services, numerous transitions have led to a landscape that looks remarkably different than it did a mere decade ago. Phone calls have been replaced with texting and chatting. DVDs have been traded for media downloads and streaming digital platforms. And a massive move toward VoIP has led wireless, cable, and software companies alike to offer new types of voice services.
Of course, there are many more changes to come, with one continuing trend in particular behind it all – data. With the anticipated mass rollout of 5G, both business and consumer appetites for data-intensive apps and services are bound to skyrocket.
So, it is easy to understand why so many companies are redefining how they will meet consumer demand and rethinking how they can remain competitive. Many voice, video, and technology services are already converging via communications service providers (CSPs) that offer various combinations of voice, media, content, entertainment, and apps over networks designed to serve as rich, functional platforms.
However, in the midst of tremendous opportunities, there are also some accompanying big risks — ones that many companies tend to overlook. Near the top of the list is communications taxation. While businesses may be used to collecting and remitting sales and use tax, a failure to consider the communications tax implications of new offerings can lead to unanticipated liabilities.
That means, in many cases, what begins as an exciting new product launch has the potential to end in costly penalties and interest. To avoid such a fate, it is imperative for companies to become familiar with the possible tax ramifications of new business models, and to revisit rules and regulations both early and often.
The Arrival of 5G
With the long-anticipated rollout of 5G, expectations are high for desirable business models — and companies across industries are paying close attention. According to Ericsson's latest report, The Industry Impact of 5G, 74 percent of businesses plan to invest in 5G technologies to create more value for customers. And while 59 percent of companies surveyed in 2016 said 5G would not be on their radar for at least five years, that figure fell significantly to just 11 percent in 2018.
As 5G broadly rolls out, it is expected to power a profusion of new services. In many instances, the increased speed and lower latency will be used to enhance existing data-intensive services. In other applications, new capabilities will be combined with IoT technologies such as sensors, machine learning, artificial intelligence, and telematics in efforts to take businesses to the next level.
For carriers, 5G investments might mean expanding beyond traditional communications services to enter new areas such as eCommerce. For other companies, the move may involve increasing profit margins by focusing attention on SD-WAN and other high-value offerings.
Carriers and service providers have made clear that some of these new offerings are likely to roll out soon, while others are still a blip on the horizon. Regardless of where, when, or how they are introduced, the implications are the same. The transition is not just going to change how consumers and companies interact with the world. It may very well transform business relationships with tax authorities, too.
Put simply: The latest industry advancements will very likely cause even more confusion and complexity for taxes.
Communications Tax Complexities
As current trends expand, the complexities of communications taxation will continue to grow. For this reason, analysts say it is imperative that companies remain aware of the possibility they could become liable for communications tax — something that could occur as soon as a product or service begins transmitting data. Getting ahead of any potential communications tax responsibility will be key to gaining a competitive advantage.
The arrival of 5G is predicted to have enormous implications for communications taxes — Aberdeen researchers
“The arrival of 5G is predicted to have enormous implications for communications taxes,” Aberdeen researchers said in a 2019 report, Communications Tax Compliance: Surviving and Thriving with Preparedness and Agility. “5G will enable sensors to transmit data approximately a hundred times faster than its predecessor, 4G, and could empower a multitude of new companies to enter the market.”
“As a result of these dynamics, policymakers are scrambling to keep up and determine how to tax the associated infrastructure and technology.”
However, while most businesses are familiar with the process of collecting and remitting sales and use tax, many are unaccustomed to the depth and complexity of communications tax. In addition to some incredibly complex calculations, communications tax varies significantly across local, state, and federal regulatory authorities.
In addition, while typically lagging, rules and regulations have been known to change daily across jurisdictions. The rapid pace of innovations, mergers, and acquisitions — not to mention the complexities of bundling and nexus — will all impact how communication services are taxed.
Many companies are currently opting to collect sales and use tax alone, but this is a big gamble. What would happen to the business if it faced a sudden tax shock? In addition to back taxes, you may incur both interest and penalties — and the company could be forced to contend with negative customer reactions if potentially raising prices to cover the costs.
At the heart of the matter is one mission-critical question; when and how will communications tax apply to new products and services? Unfortunately, the answer is not an easy one.
Most integrated small cell poles mount the 4G/5G antennas or radios at the top of the pole to optimize performance and make concealment easier. The overriding characteristic of pole toppers should be flexibility in configuration, so the radios can be positioned optimally (and eventually upgraded) depending on the needs of that particular site. Importantly, the pole manufacturer must be able to provide a concealment material that does not interfere with the 5G mmWave signals.
To meet required coverage patterns, multi-tenant siting and future upgrades, the pole topper should have a uniform form factor that can host different brands of 5G radios, as well as be backwards compatible with lower frequency bands. With unique mounting options, the form factor can support different orientations of the radios, radios on different levels, on top of one another or back-to-back.
Technology is advancing far faster than policymakers’ abilities to adapt rules and regulations. As a result, tax laws are a patchwork of transition as thousands of local jurisdictions, states, and the federal government seek to regulate an industry that is in a continuous state of change. That means different areas of communication are all taxed in very different and, exceptionally, complex ways.
With some of the most complicated tax calculations and filing requirements of any industry, communications tax can make it incredibly difficult for companies to know when, where, and how to stay compliant as they adopt new business models. This is why, even in the midst of tremendous progress, this one area can quickly become a detriment to growth.
The successful communications company will remain up-to-date on the latest changes and challenges and watch for potential transitions on the horizon. In particular, it pays to watch several potentially sticky areas: Nexus, bundling, marketing, and business structure.
“Nexus” defines the level of a connection between a taxing jurisdiction and a business entity. It is important to understand because state taxes are not typically imposed until nexus has been established with a company. While each state has its own unique definition of nexus, most consider “physical presence” as one of the key determining factors. Many also look at “economic connection," which is determined based on the amount of sales a business generates within the state or jurisdiction.
For this reason, many companies know to consider sales and use tax when determining if they are obligated to file and remit to state and weigh physical factors such as the presence of warehouse facilities, storefronts, and employees. What they may not know is that nexus can also apply to communications technology, even in instances where there’s little more than invisible, undetectable digital signals to track.
Because each state has its own set of factors, determining when a company is obligated to register and comply with state communications taxes has become a highly complex process. And the more states a company sells in, the more complicated it gets, especially since the minimum threshold can vary wildly from state to state. When you add in the complexities of bundling, the process becomes even more complex.
These intricacies are becoming a big issue for even the largest and most established carriers, not to mention fast-growing companies looking to capitalize on 5G.
When it comes to new data-driven business models, it is beneficial to both consumers and businesses to provide “bundled” offers. These are offers that provide several different services presented as a single package. They make one-stop shopping easy for the customer and can provide a competitive advantage for the provider.
But here again, the complexities of communications taxation can make a mess of an otherwise sound, competitive offering. That is because the moment a non-taxable service is packaged with a taxable one, the entire bundle may become subject to communications taxes and regulatory fees.
Making a difficult situation even more complex, these bundles almost always involve highly complex communications tax calculations. For instance, some elements might need to be broken out so sales tax can be levied on communications fees. Even more complex are calculations for tiered taxing, tax on tax, and prorated taxing.
Each service must be billed and reported accurately, regardless of how the bundle is marketed to customers as a unit. And while there is usually an option to lower tax liability by unbundling services in internal billing, remaining compliant requires constant research, validation, and updates to the ever-changing tax rates across states. This can quickly become burdensome when nexus grows beyond a few states, or for those who are new to communications tax.
One often-overlooked reason for communications tax complexity is the lack of coordination between internal teams, especially when it comes to marketing. Products might inadvertently be categorized as communications services for tax purposes as a result — well before various departments have time to understand the implications.
For example, consider the technology company that decides to scale its portfolio of services to include SD-WAN or other data services. In this scenario, it is not uncommon for sales and marketing to move forward with exciting product launch plans.
However, if those departments use certain terminology when promoting new offerings, there is a very real risk that the content could trigger a communications tax audit. Believe it or not, something as simple as incorporating “voice calls” or “video conferencing” into website copy can render the business subject to the complexities of communications taxation for the first time.
On the one hand, every innovation is an opportunity to gain more market share. But, from the perspective of tax authorities, they may also open the door to new sources of tax revenue. With so many agencies facing budget shortfalls following the dramatic decrease in traditional telecom services, state auditors will continue to watch closely for new entrants into the communications tax space. As standalone IoT solutions and specialty software become more prominent, so does the threat of communications tax audits.
In an era when emerging technologies are leading to new partnerships and business relationships, it is vitally important to stay aware of who is responsible for communications tax, and when — particularly when it comes to protecting the bottom line.
For example, consider the auto manufacturer that enters a relationship with a wireless company to provide telematics and voice service. The important question to ask in this scenario is, “Who will be responsible for collecting and remitting communications tax? Will those taxes be charged early on in the supply chain, or will they be eventually passed on to the end consumer”?
Finding accurate answers means that both businesses will need to carefully consider the contractual language that’s used. And, while many companies tend to overlook this step, it is a vital one — especially since it will dictate when resale and exemption certificates need to be procured.
This issue is one that will, no doubt, be faced by a growing number of companies as they explore new and innovative ways to deliver voice, information services, high-speed data, and the IoT. Across the landscape, business-altering decisions will need to be made on who is responsible for what, and when, down the entire supply chain.
This is yet another area where it may be time for many businesses to start factoring in the complexities of communications taxation. The reason: A surprising number of tech companies are now promoting offers that could make them responsible for hefty communications taxes and fees, without ever realizing they are liable to states and the federal government.
If those liabilities are not caught and brought up-to-date before a merger or acquisition, the result could be a painful headache for the acquiring entity in the form of penalties, back taxes, and new charges for unsuspecting customers.
Preparing for 2020 and Beyond
As technology advances and competition accelerates, more tax changes are yet to come. With new offerings hitting the market virtually every month, communications tax authorities will be seeking new ways to capture revenue from these products and services.
Maintaining compliance in this ever-evolving tax landscape requires several critical components that all businesses should be aware of. The more a company plans ahead for the implications of communications tax, the better able the businesses will be to reduce errors and minimize audit liabilities.
First, it is important that all key players are able to analyze new technologies at a basic level. By breaking down the fundamental components of a new offering, it can become exponentially easier to understand when a product or service may be taxable — or at least know which questions to ask to make that determination.
In addition, it is imperative to stay up to date on the latest changes. Moving forward, different departments will need to understand how each new technology could be impacted by communications taxation. Those responsible for product planning, product launches, and marketing in particular — not to mention accounting and finance — should all remain aware of the latest communications tax and regulatory laws.
These steps apply even to the businesses that are not currently liable for communications tax. Just because a company is not subject to complex rules and regulations today, that doesn’t mean its status will not soon change in the eyes of auditors.
Lastly, for companies that are still new to this space, collaboration is key. In fact, one of oldest and simplest strategies — networking with colleagues to see what others are doing to manage risk — can be the best way to stay ahead of tax complexities. In some cases, ensuring compliance may involve bringing on an advisor that specializes in the complexities of communications tax.
Many businesses are finding that communications tax can get very complicated, very fast, and that it pays to have an expert on hand to help keep costly penalties and fines at bay.
The Future Is Here
It is an exciting time for business growth, and the opportunities for expansion will only continue to multiply. In the midst of all this change, it pays to keep the auditor in mind. The more a company prepares for the potential communications tax impacts of 5G and related innovations, the better prepared the business will be to maximize every opportunity — minus the risk of a financial shock. And that is a competitive edge worth pursuing.
Steve Lacoff is General Manager of Avalara’s Communications business unit. He previously served as Avalara’s Senior Director of Product Marketing. Steve has spent 20+ years in the Telecom and SaaS industry with experience across Data, Voice-over-IP, and Video Streaming. In his leadership roles at Comcast, Bandwidth.com and Sprint Nextel, Steve developed deep expertise across business development, product, marketing, sales, and partner and channel enablement. He is a graduate of the Georgia Institute of Technology and earned his MBA from Northwestern University – Kellogg School of Management.