The communications industry is subject to some of the most complex tax laws in the United States, and there are plenty of places to make an error in calculating, collecting, remitting, and reporting the necessary taxes on products and services in this sector. Here are five common tax compliance mistakes that telecommunications companies make and how to avoid them.
1. Incorrect Sourcing of Customer Locations
Communications tax makes the collection of sales and use taxes dependent upon an end-user’s location, yet determining where a customer is can be challenging.
While telecom services such as cable television, cable satellite, cable internet, and landline phones are connected to a specific address, this isn’t the case for VoIP and wireless services. Companies often don’t conclusively know the location of a VoIP or wireless customer when the customer uses these services, and sometimes a location can’t be definitively identified even after reasonable investigation.
Without conclusively knowing a customer’s location, telecom companies can assess incorrect tax rates and remit taxes to the wrong taxing jurisdictions. This can lead to increased audit risk, and the penalties, interest, and past-due communications taxes can become extensive if the mistake occurs across multiple accounts for an extended period.
Incorrectly identifying customer locations can be avoided by taking reasonable measures to determine where a customer is located. If a customer is intentionally deceptive of their location, the customer is likely liable for the consequences of their action. If a company doesn’t take reasonable measures to prevent this mistake from occurring, it is likely liable for the tax consequences.
2. Inaccurate Bundling Tax Collection
Bundling is pervasive throughout the telecommunications industry, and this creates a unique but straightforward risk. When bundling costs are miscalculated, the tax collection on these services becomes incorrect. Inaccurate bundling can lead to a host of potential problems, including computing complex calculations incorrectly, charging tax on tax, taxing tiered services at wrong rates, and other issues.
Because inaccurate bundling calculations are usually across many customer accounts, this error can result in substantial liability. To minimize the risk, telecom companies should automate the bundling calculation process with software that’s updated and supported by an IT team that can promptly resolve calculation mistakes when they arise.
3. Improper Billing of Customers
In some cases, communications tax issues result from simple billing mistakes. When telecom companies charge customers for the wrong communications services, the taxes that are collected will almost certainly be incorrect. This sort of error can happen when a customer is automatically billed on their credit card, when a customer’s cancellation request isn’t executed or for a myriad of other reasons.
While software also plays a significant role in avoiding billing-related tax issues, having a robust and capable customer support team can also help mitigate these problems. While a few issues may inevitably arise, a customer support team can quickly resolve these instances so that the problem is corrected rapidly and any related tax issues are minimized.
4. Relying on Sub-Par Software Solutions
As the two previous mistakes show, the software that telecommunications companies use is vital to the accurate collection, remittance, and reporting of taxes. Sub-par software solutions that don’t cover all of the communications tax needs that a company has will increase the likelihood of mistakes that lead to audits, penalties, and/or interest.
To address this potential issue, telecom companies should view the purchase of robust communications tax software as an investment. The right software will streamline the process of collecting and remitting taxes, coordinating multiple facets to improve efficiency, reduce mistakes and better ensure compliance.
5. Failing to Remain Current as Communications Tax Law Changes
In addition to ensuring that they’re compliant with all current communications tax requirements, telecommunications companies must also remain compliant with future obligations. Many companies fail to stay current when communications tax laws change, especially because so many jurisdictions monitor legislative changes.
Failing to promptly update practices when laws do change can create immediate audit and liability risks.
Few companies have the resources to remain current on tax law changes in all relevant jurisdictions. Instead, this mistake is best addressed by working with a communications tax consultant who’s familiar with this area of tax law. A knowledgeable consultant will regularly monitor for tax law changes, and they can help a company adjust its practices accordingly when new laws are enacted.
Work with Knowledgeable Communications Tax Consultants
A knowledgeable communications tax consultant won’t only help with the mistake of not monitoring tax law changes, but they can also help avoid all of these other mistakes. A consultant who specializes in this area of tax law can work with companies to source customer locations and set up appropriate software. They can also attend to preparation filing and tax return needs, serving as a general resource center on all matters related to communications tax.
If your company is subject to communications tax and needs a knowledgeable consultant, contact us at FAStek. We focus specifically on this area of tax law, and we’ll work with you to avoid these mistakes, so your company’s tax audit and liability risks are minimized as much as possible. With our assistance, you can be confident that your company appropriately attends to its communications tax responsibilities and obligations.
Contact us via our website, email us at info@fastektax.com or call us at (405) 384-1140. One of our tax consultants will respond quickly to help assess your company’s communications tax needs.