Telecom taxes encompass a range of federal, state, and district taxes and fees that telecom companies are responsible for collecting and submitting. Though they may be perceived as a sort of sales tax or excise tax on telecom services, they are much more regulated and extensive than standard sales tax.
The telecommunications industry is the most heavily taxed service industry, behind only the product-focused fuel and rental car industries. Hundreds of tax types and bases create hundreds of thousands of different potential filing requirements when all federal, state, and local taxes are taken into account.
What Companies are Required to Pay Telecom Tax?
Telecommunications tax obligations apply to an array of companies that provide communications services. As technology advances faster than legislation is updated, this includes a widening group of companies. Generally, these types of businesses are subject to telecom taxes:
- Providers: Telecommunications providers are the most obvious group subject to telecom taxes. These include companies that directly provide communications capabilities, such as voice calling and text messaging.
- Emerging Businesses: A variety of emerging businesses that operate tangentially to traditional providers are also subject to telecom taxes. For example, wireless communications providers, prepaid providers, voice over IP businesses, and interactive entertainment businesses may have to collect some of these taxes.
Many established telecommunication companies have obligations under both providers and services. When dual obligations exist, it’s important to separate the provider-related and service-related communications taxes collected. Doing so can be a complex process if products and services are bundled together (as they often are).
Businesses that are unsure whether they’re subject to telecom taxes should speak with a communications tax professional. A specialized professional will be able to provide informed advice regarding telecommunication services or related company’s obligations.
What Are the Specific Telecom Taxes That Companies Must Collect?
As mentioned, there are potentially hundreds of thousands of different telecom tax filing requirements. The regulating authorities are multifold, the taxes are numerous and the tax rate is high — rates over 18 percent aren’t uncommon.
The regulating authorities that may assess taxes and some of their corresponding telecom taxes include:
- Internal Revenue Service (federal excise tax)
- Federal Communications Commission (federal USF)
- States (sales and use, gross receipts, occupation taxes)
- State Public Utility/ Service Commissioners (911 fee, USF, TRS, DEAF, surcharge)
- State Public Utility/ Service Commissioners (access fees, utility fees)
- Municipalities (sales and use, gross receipts, occupation taxes)
With so many different tax obligations, merely managing to bill, collect, and remit the different taxes and fees is a major accounting challenge. Of course, the logistics don’t even consider the challenges associated with determining what various taxes and fees a company should be collecting.
How Should Telecom Companies Approach Communications Service Tax Issues?
All industries’ tax laws have some gray areas, and telecom tax is no different. How companies should approach the unclear tax issues they face also isn’t clear cut. Being too aggressive or too conservative, each has its potential consequences.
Companies that are too aggressive with their interpretation of ambiguous tax matters may have a competitive advantage, for their customers will pay less if they collect fewer telecom taxes. This advantage comes with notable risk, though. The aggressive interpretation could create an enormous liability in the event of an audit, and any such liability could easily exceed the gain from that competitive advantage. Audits are becoming more common, and companies can’t back-bill customers for previously uncollected taxes.
Conversely, companies that are too conservative may miss out on potential market share. While minimizing potential tax liabilities reduces audit-related risks, an overly conservative approach results in customers paying more than they probably should. Competitors who have less aggressive approaches to telecom tax collection will be able to charge customers less and thereby gain an advantage.
Striking a balance between these two extremes requires detailed knowledge of how telecom tax laws are applied and a thorough understanding of a company’s situation. A telecom tax consultant can help companies decide how to handle ambiguous issues so that they don’t take on too much risk yet remain competitive within the industry.
How to Ensure Telecom Compliance
To speak with a telecom tax specialist who can help your company, contact our team of experts. We have the expertise necessary to help your company navigate the many tax complexities that come with providing communications services.
We’ve worked with many providers and emerging businesses in the telecommunications industry, and our consultants are highly knowledgeable and experienced in this specific area of tax law.