State communications services tax (CST) is a particularly complex field of tax law. In addition to the complexities of managing different tax rates across multiple jurisdictions, rapid innovation is creating uncertainties as tax codes are slow to catch up with technology.

If managed improperly, these uncertainties can leave businesses that are responsible for calculating, billing, reporting, and remitting state communications services taxes with significant potential liability.

While a complex issue, state communications tax isn’t impossible to navigate. Companies responsible for state and local taxes can confidently collect and remit as required with a communications tax professional’s help.

Here’s a guide to the general process.

1.) Determine Taxability for Services

Before implementing any state communications services tax, companies must first determine the taxability of their services. While information or signals transmitted by any medium might be taxable, many factors can impact CST taxability. 

For example, whether voice, data, audio, video or any other information is subject to CST can depend on criteria like the following:

  • Where a service is provided
  • What a service does
  • How a service is provided
  • Whether the service connects people
  • What the customer’s tax status is

Moreover, services must be considered in light of each state’s specific tax code. Though the Florida Department of Revenue taxes likely won’t be the same as what New York or Texas taxes, and the same principle generally holds true across all states. 

In some cases, a service that’s taxed heavily in one state might not even be taxed at all in another state. Since each state has its own state communications services tax law, companies can’t assume that their services will be taxed uniformly. Instead, they have to investigate taxability 50-plus times for each service.

2.) Become Compliant With States’ Tax Laws

Once taxability is determined, the next stage is to come into compliance with each state’s requirements.

States each have their own specific requirements that should be checked and adhered to. However,  achieving compliance usually is a fairly uniform process across states. There are normally four distinct steps to the process:

  1. Registering with the tax and licensing authorities, as required by state law
  2. Calculating of the applicable state communications services taxes and fees
  3. Billing customers for the calculated taxes and fees
  4. Reporting and remitting the taxes due to the proper state tax authorities

(To remit taxes simply means to return taxes to the appropriate authority.)

Of these four steps, calculating has the highest degree of complexity. Businesses that have new communications innovations must determine how to manage tax obligations. Even if the state communications tax code isn’t yet updated to address the new technology innovations.

When making these calculations, it’s important to take a discerning approach that’s not too liberal or too conservative. Being too liberal can lead to significant liability if a future ruling goes against a business’ interpretation. However, taking an overly conservative approach can create a financial burden that inhibits competitiveness in the marketplace.

The other steps are fairly straightforward, and they ought to be streamlined wherever possible. While registering is difficult to streamline, billing, reporting and remitting state communications taxes can all be automated with the right software.

3.) Monitor State Communications Tax Code Changes

A business’ state communication tax code responsibilities don’t end once calculations are made and automated solutions are implemented. Even at this point, businesses must continue to take a proactive approach. 

Specifically, businesses should continue to monitor state communications tax codes for changes. Although tax laws typically lag behind technological innovation, laws usually are eventually updated. Businesses must reassess taxability, recalculate taxes, and adjust billing, remitting, and reporting when states do update their tax codes.

Two male Communications tax professionals

Work With a State Communications Tax Consultant

All of this is a lot for businesses to do, and many find that it’s too much. Businesses often choose to hire a state communications tax consultant instead of handling all of this in-house.  Outsourcing to a consultant both helps ensure businesses make informed decisions and lets businesses focus on their core competencies. 

If your business needs a compliance team to help with state communications service tax, contact us at FAStek. One of our representatives would be happy to discuss how our consultant and automated tax software can take care of our CST issues.