Previously, we gave an overview of how IT and telecom companies have special challenges regarding sales tax and regulatory compliance because of what such companies sell.
Sales tax compliance for technology is about definitions of what you sell, and about whether what you sell, for various reasons, is taxable or non-taxable. IT and telecom companies, for example, must determine if they sell Software as a Service (SaaS), an information service or a strictly telecom service. Unfortunately for IT and telecom companies trying to determine their sales tax obligations, they may sell some hybrid combination of all three – or more.
But if you’re a telecom company, you must address the tax and regulation of each component of your product or service.
The crossover
Telecom products and services generally fall into a few major categories:
- SaaS allows a customer to leverage computational capabilities of a hosted software application.
- Information service involves furnishing information/data compiled for the customer and delivered in either a tangible or electronic fashion. (It doesn’t usually include personal or proprietary information or data.)
- Telecommunications Service offers telecommunications for a fee directly to the public regardless of the facilities used. It includes transmission of images, sounds or signals over radio, wire, optical or other electromagnetic systems.
SaaS, already an enormously complex product for sales tax compliance state to state, is an example of a potential component of a telecom’s offerings that can now complicate sales taxes and often crosses into the boundary of a telecommunications service for companies that provide such services as call routing, auto dialing or SMS messaging.
Examples of well-known companies primarily known for SaaS or software solutions but which also integrate voice and SMS/text messaging capabilities are Slack, Microsoft Dynamics 365, Google Workspace and Shopify, among others. Many well-known telecoms offer SaaS solutions or platforms that bundle hosted software with voice communications and SMS/text messaging: Dialpad’s cloud PBX, chat and SMS, fax and voicemail, file sharing, meetings and video conferencing, with integration capabilities with various productivity apps; and Microsoft Teams’ UcaaS platform with extensive integration with Microsoft apps, telephony and comm features; and Zoom’s UcaaS package that includes a cloud VoIP system, whiteboard functionality, instant messaging and video chatting, to name a few.
How to handle a big tax obligation
If you have customers all over the country, you’re also going to have exposure in thousands of jurisdictions – not just states but many cities and counties with special telecom taxes, 911 fees, utility taxes and license fees. You could end up with a couple hundred returns if you’re classifying part of your service as a communications tax.
Optimization is your key to reducing your tax and regulatory obligations, which means you try to break the components into appropriate categories until you’re clearly looking at items among your offerings that are taxable and not taxable. The positions you take and how you unbundle can make a big difference to your tax risk – and the cost of your product to your customers.
In a future blog, we’ll look in more detail at successful optimizations and how they might work in the real-world taxes of a state.
For more, see our webinar, “Deciphering Tax Obligations: Accurately Defining Your Technology Solution for Tax and Regulatory Compliance.”
Let TaxConnex manage for you all the changes and challenges that come with sales tax compliance in telecom, technology and other industries. Contact us to learn what it means when sales tax compliance is all on us.
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