So, you’re a VoIP operator trying to figure out your VoIP taxes. Confusing, isn’t it?
It’s so confusing that many new operators decide that calculating telecom tax is just too complex (our VoIP whitepaper can help). Some implement the “Ostrich Strategy” and stick their head in the sand - figuring that they will pay their tax once they get “big enough”. Other operators rely on best guesses or tax advice from their general accountants and attorneys. Either choice can be disastrous, leading to audits from any number of federal and state agencies that can put their VoIP start-up on the road to destruction before it even gains traction.
Let me help you sort through the VoIP tax confusion. Let’s start with the beginning.
VoIP tax was born in 2004. As the FCC attempted to shore up the Universal Service Fund, it created the “IP-in–the-Middle” Order. In that order, the Commission ruled that VoIP is a telecommunications service and thus subject to USF obligations if it is “an interexchange service that: (1) uses ordinary customer premises equipment with no enhanced functionality; (2) originates and terminates on the public switched telephone network (PSTN); and (3) undergoes no net protocol conversion and provides no enhanced functionality to end users due to the provider’s use of IP technology”.
Next, regulated VoIP was defined in 2005. The FCC created a new category of regulated communications service called I-VoIP (Interconnected Voice over Internet Protocol. I-VoIP is the standard that the legal community uses to decide which VoIP services are regulated). The FCC defines I-VoIP with four major characteristics, and a provider must possess all four of these characteristics or it is not I-VOIP, but perhaps a VoIP Toll. (For a detailed understanding of these characteristics, please download our VoIP whitepaper).
Suppose you checked your VoIP offering versus the FCC’s four characteristics and you’ve determined that you are regulated. Now you need to figure out what "flavor" of VoIP you are offering.
While the FCC has defined two categories of VoIP (I-VoIP and VoIP Toll), there are still different flavors of VoIP within these categories - such as Fixed and Nomadic VoIP (details are included in the VoIP whitepaper) - and each flavor carries with it even more nuances.
These flavors are important. Each VoIP nuance carries significance not only at the federal level, but also at the state level because taxation and regulation vary so much from state to state. Some states limit their regulatory powers to E-911 and Public Safety, while others regulate through their Department of Revenue and other state taxing authorities. The taxes that they may assess include:
- State and Local Sales and Use Tax
- Excise Tax
- Gross receipts tax
- Utility Users Tax
- E-911 (both State and Local)
- Local Telecommunications taxes
If you are an I-VoIP; you must also file a Form 499-A (at a minimum), which reports your revenue data for the calculation of obligations to:
- Federal USF
- Federal TRS (Relay) Fund
- North American Numbering Plan Administration
- Shared costs of local number portability
- FCC Regulatory Fees
Still confused? It’s understandable. It’s a complex subject.
What next? The first step is to download our VoIP whitepaper. Then, watch for our next two installments of this blog. The whitepaper and blog articles will help you sort this out. Until then, figure out what flavor of VoIP you offer. Here are some questions you should answer:
- Is the service fixed or nomadic?
- Is the service associated with static IP address or is it “over the top”?
- How do I source the fees, by jurisdiction of the calls or billing address?
- How do I represent these taxes properly to comply with Truth-in Billing? (Hint: see blog post #3 in this series).
If you need more immediate help, contact me. I’m glad to talk you through issues and share my expert contacts with you.
Until then...stay tuned for Part Two – Tax-on-Tax..