Taxation of Prepaid Wireless
Taxation of prepaid wireless services can be complicated even for sophisticated businesses. Communications service providers are among the most heavily taxed and regulated industries in the United States.
In 2014, an estimated 300 types of telecommunications taxes, fees, and surcharges applied to potentially 685 different tax bases. These taxes were imposed by tens of thousands of tax authorities at the federal, state, and local levels. Such tax burdens can result in up to 48,000 unique filings for some entities. And, in addition to the administrative burden associated with tax compliance, some companies face a tax burden upwards of 18% in certain jurisdictions.
Navigating compliance in such an environment can be a challenge, to say the least. Yet, while tax compliance can be incredibly burdensome, it can also present a competitive opportunity. Optimizing and managing tax collection practices can give a provider a competitive edge over competitors that fail to take steps to optimize their compliance. Companies should, however, be careful, and consult with counsel when devising any tax strategy to avoid running afoul of applicable laws. In particular, providers must diligently manage compliance to avoid underpaying taxes or over-collecting from customers.
Telecommunications transactional taxes come in many forms, primarily falling within these categories: (1) sales taxes; (2) excise taxes; (3) gross receipts taxes; and (4) surcharges and fees. Each category presents unique challenges. We’ll put aside gross receipts taxes and surcharges/fees for the moment. For sales and excise taxes, at a minimum, providers must consider the following high-level issues:
- Nexus: Can a jurisdiction tax a provider? (i.e., does the provider have sufficient contacts with the jurisdiction?)
- Taxability: Is a service taxable?
- Sourcing: What portion of the revenue from a sale should be sourced to and taxed in a given jurisdiction?
These issues can be especially complex for prepaid wireless service providers, and in particular, for companies selling rechargeable SIM cards. Take nexus, for example. In order for a jurisdiction to have authority to require a company to collect and remit taxes, the entity must have sufficient nexus (contacts) with the jurisdiction. There are a few nexus tests which may apply to telecommunications services. First, there’s the general physical presence standard, where nexus turns on a company’s degree of physical presence (such as offices, equipment, telecom infrastructure, employees/contractors, etc.) in a jurisdiction. Now, for communications services specifically, there’s a broader test based upon the end points of call traffic. This test largely comes down to where a company maintains customers that either originate or terminate calls and can lead to establishing nexus nationwide. Finally, there’s economic nexus. In some jurisdictions, if a company earns a certain amount of revenue in the state, regardless of its other contacts with the state, it has nexus with the state for tax purposes.
Establishing nexus triggers tax compliance obligations in a jurisdiction including registration, collection and remittance, and resale compliance, all of which may necessitate an investment in a robust tax calculation engine and billing software.
After determining whether the entity has nexus with the state, a provider must evaluate whether a given service is taxable. This involves an examination of each element of every service offered, in each jurisdiction for each tax type. Bundled offerings create an added layer of complication. Prepaid wireless providers, in particular, tend to bundle services together – data (Internet access), calling (voice service), and SMS/text messaging. And, in some cases, a bundled offering may also include equipment charges. Not all of these elements are necessarily taxable in all jurisdictions. But, bundling all of these elements together for a single price creates complexities for taxation. For example, while some states (with support from books and records) will allow a company to unbundle (or allocate portions of the bundled price to the individual components of the service), others will treat the entire bundled price as taxable (unless the pieces are separately invoiced). Bundling is something every provider should consider carefully as it can significantly impact the entity’s tax liability. SIM cards also present unique challenges because they may be treated differently by different taxing authorities. For example, some jurisdictions treat SIMs as tangible personal property, while others consider them a means of accessing a service. Since some sales taxes apply only to tangible personal property and others to both tangible personal property and services, this treatment can impact the taxability of SIM cards.
Finally, there’s sourcing to consider. Sourcing means evaluating which jurisdiction’s tax rules apply. Each transaction must be separately analyzed which can be difficult for a sale that touches multiple states (e.g., phone purchased in Virginia, SIM purchased in Georgia and recharged online; phone call made from Georgia to Florida). Adding to the complexity, the sourcing analysis varies by state. Most states apply the destination-based sourcing model where the revenue from a sale is sourced to the place where the product/service is shipped or will be used. A few apply origin-based sourcing where the revenue is sourced to the location where the product originates (is shipped from/provided). Because SIM cards are often sold online and can be recharged, they trigger special sourcing considerations.
In sum, tax compliance is complicated, particularly for prepaid wireless/SIM providers. Providers must, at a minimum, consider nexus, taxability and sourcing issues, and take steps to ensure multi-jurisdictional compliance, including but not limited to registration, collection and remittance of taxes at local, state and federal levels. On the bright side, while tax compliance can be extremely complex, it also presents a competitive opportunity for those willing to take the time to optimize and manage compliance in consultation with experienced counsel.
Meet Jackie Hankins at The Prepaid Expo
Taxation of prepaid wireless can be complicated even for sophisticated businesses, but it does not have to be. Join Attorney Jacqueline R. Hankins of The CommLaw Group as she explains in plain English the complexities of prepaid wireless and SIM card taxation. Topics will include how your company determines if it has to pay taxes to state and local governments, whether the services you provide are taxable, and rules for deciding where to pay taxes for each call your customers make and receive. Ms. Hankins is a Senior Managing Attorney at The CommLaw Group, and is experienced and knowledgeable about regulatory and tax treatment of prepaid services. During the session, she will share tips on complex taxation topics based on her experience counseling numerous clients and helping them to implement ongoing tax compliance plans. At the close of the session, Ms. Hankins will be available to discuss and tackle even your most complex tax compliance questions.
Jacqueline R. Hankins is a Senior Managing Attorney at Marashlian & Donahue PLLC, The CommLaw Group, counseling clients on a variety of regulatory, tax and transactional matters. Ms. Hankins is also an experienced litigator and a member of the firm’s Litigation team, focusing her litigation skills on complex civil and administrative matters. Ms. Hankins advises a wide range of companies, including VoIP service providers, competitive carriers, wireless/MVNOs, Internet access, satellite, and prepaid providers, among others.