Are you a technology company that is offering communication services to customers in any way, shape, and form?
Do you know how Communications Tax works and whether you are liable to pay the same for your business?
Have you tried evaluating your Communications Tax only to be bogged down by the various state and federal laws regarding the same?
If you are looking to trace the history of communications tax, you need to go back to the time of wired telephones. The first instance of the levying of this category of taxes started with the humble landline phones.
With internet technology and digital platforms changing the way we live our lives, the same has had an impact on communications. Compare the period where you just had landlines to talk to the period you are living in now, and you will see the drastic difference.
In this article, we look at one very important, yet an ignored area of taxation and regulations- Communications Tax. We try to identify what does it mean, why should businesses take this seriously and what are some of the challenges of the same.
Communications Tax: Meaning and Definition
Over the last few years, as digital technology has advanced by leaps and bounds, the way we used to communicate has changed fundamentally. In 2021, individuals and businesses are communicating using-
- Voice and data on cellular devices like mobile phones, tablets, and computers.
- We are using different kinds of cables to help us communicate.
- Satellites, Optical Fibres, and VoIP have become standard mediums for communication.
- The IoT is expanding the horizon of smart devices and communications to and from them.
Understanding Communications Tax for businesses becomes a complex procedure. If you compare the same with sales taxes, communications taxes are far too complicated.
This is because, in a day and age governed by internet businesses and different physical locations of customers, analyzing every sale, discount, and offer from the vantage point of taxes involves certain layers.
However, for small and medium businesses that are heavily dependent on this, it means that they need to get their paperwork in order and file the taxes.
If they do not, they are staring at a list of long penalties, that include heavy fines and cancellation of business licenses and registrations.
Why Communications Tax is Difficult to Understand and what makes it Complex?
According to leading business attorneys in Chicago, any form of business taxation requires an understanding of both legal as well as financial knowledge. One reason that a lot of other plain tax accountants are unable to understand and manage communications tax is that it requires a high degree of legal understanding and intricate knowledge about the rules and regulations.
As we have already mentioned in the introductory sections, there are multiple channels of digital communications. In some cases, there are so many channels that keeping track of the same might get confusing.
This confusion is expanded and makes communications tax complex because of the following reasons-
1. Differing Jurisdictions-
In simple words, a communications tax is subject to local, state, and federal jurisdictions. This means that you have three differing compliances to take care of. It also means that you need to file the paperwork and pay the required taxation amount with three different authorities.
2. Heavily Regulated-
The Nexus Tax Laws following the Wayfair Versus The State of South Dakota Supreme Court ruling has opened Pandora’s box when it comes to communications taxes. This has made the same even more nuanced and complicated. There are a lot of little details to take care of.
3. Multiple Digital Channels of Communication-
Many experts point to the fact that the IoT or Internet of Things and the rise of smart devices have added to the complication. With home assistants and connected car technologies becoming second nature, the scope of communications taxes has increased.
4. Zero DIY Potential-
Unlike your normal income taxes, you cannot possibly opt for a DIY route when it comes to Communications Taxes. If you are not an out-and-out expert when it comes to this, there is no point doing mistakes and inviting additional penalties and fines for your business.
5. Lack of Proper Information from the Authorities-
You need to understand that the scope and ambit of Communications Tax is not all that mainstream. Governments at both the state and federal levels too are struggling to understand the same. This is preventing the creation of a holistic direction or way forward in this regard.
The Best Practices of Communications Tax according to Taxation Experts:
In this section, we try to list down some of the things that businesses can do to make the process of filing for communications tax easier.
- Being aware of the physical location of the customers will allow a business to understand the state laws regarding sales taxes. However, VoIP and another wireless tech can make this process a lot complicated and problematic.
- Businesses must follow a certain set path when offering bundled solutions to customers and keep a definite track of the same. With Ecommerce, you know the various discounts, offers, and freebies. The key is to bundle them together effectively.
- Ensuring ‘Truthful Billing’ standards are followed as dictated by the authorities is important. This is one simple area that many businesses do not pay careful attention to. If you have the billing done right, paying communications tax becomes easier.
- Putting all the sales and taxes into the different brackets or buckets will help make the process easier. If you are not aware, there are multiple tax structures and brackets like prorated taxes, tax on tax, retrospective taxes, tiered taxes, and self-taxes.
The Bottom Line:
If you are a small or medium business that has to pay communications tax, you should work with an expert. The simple reason is that, unlike an income tax, this is a far too complex procedure for you to exhaust your time, energy, and effort on.
You can hire a professional that is adept at doing this day in and day out. While they take care of the same, you can concentrate on more important areas of the business. However, you need to keep this at the back of your mind at all times.
Failure to comply with the same might lead to unwanted issues that the authorities may create for your business. If you wish to know more about Communications Tax, drop your questions in the comments section below.
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