Last post, we covered Mistake #1 - Not understanding what regulatory variation of VoIP you were providing.
Mistake #2 is to not understand the concept of telecom tax-on-tax.
Tax-on-tax is a difficult topic. Tax-on-tax represents a process by which telecommunications providers must factor the additional dollar amount attributable to either the same tax or a different tax invoiced to consumers into their adjusted tax remittance calculations.
Historically, tax literature has traditionally been silent regarding the rules & system of application to calculate tax-on-tax. Nevertheless, as a matter of practice, tax authorities require vendors to include tax amounts collected from subscribers within the tax base of a given tax. Consequently, tax managers need to develop an effective methodology to determine (A) when tax-on-tax applies and (B) how to calculate the amount of tax actually owed to the government. If a company doesn’t understand all of the nuances associated with factoring tax on tax correctly, the company will wind up paying tax on the amount of the tax passed-through to the consumer - even if this extra increment of tax is NOT collected from the consumer!
For example, the pass-through amount appearing on a consumer's invoice must be included in the amount of Total Taxable Revenue reported to the taxing authority on the company's tax return. If a company charges the consumer only the initial sum resulting from the 1st calculation of tax on the service, it will fail to collect the entire amount of tax owed to the taxing authority. In some states, such as New York, this could cost a provider as much as 1% in lost revenue.
The company must calculate a “grossed-up” tax rate in order to assure that the amount of tax collected and the amount of tax owed are the same.
So, what factors do tax managers need to consider in order to determine whether tax-on-tax applies and what taxes may/must be included in the base?
The first step is to determine the following:
Does any statutory exclusion exist for tax-on-tax?
Incidence of the tax. Is the tax (A) Consumer-Based or (B) Provider-Based? As a general rule, consumer-based taxes will be excluded from the tax base of other gross receipts-based taxes, while as a general rule provider-based taxes featuring an optional pass-through rule will be included within their own tax base as well as in the tax base of other gross receipts-based taxes. However, these are just general and not always the case such as in Pennsylvania where they ruled that disputed taxes and surcharges are a “cost of doing business” that a telco is only allowed to recover from customers pursuant to state PUC regulations and tariffs.
Tax Base Measurement – Is the tax levied as: (A) a Flat Fee or (B) a Percentage of Gross Receipts? Assessments imposed in the form of “flat fees” will exclude other taxes from their own tax base
Pass-Through Rules – Is the pass-through of the tax:
(A) Prohibited, (B) Optional, or (C) Required? Taxes with a prohibited pass-through rule will generally be excluded from the tax base of other gross receipts-based taxes.
Next determine if the states in which you operate are part of the Streamlined Sales Tax Project (SSTP).
The Streamlined Sales Tax Project (SSTP) adopted official policies regarding tax-on-tax. In both the Agreement itself (SSUTA) and the accompanying “Rules & Procedures” (which interpret the actual text of the Agreement), specific provisions have been adopted informing:
Taxpayers when tax-on-tax needs to be collected
Taxing authorities as to the situations where laws or regulations may be enacted to replace the default guidelines with a customized set of rules, as well as the conditions that must be satisfied in order to implement such state-specific policy “overrides”.
To know what these host of conditions are and what states apply them, download our presentation on our website entitled “Tax-On-Tax: Hall of Mirrors”.
What about Federal Taxes? Do I include those in the base?
The general rules concerning federal Taxes are:
Any federal tax that is directly imposed upon a consumer (based upon the same set of rules governing state or local taxes) are excluded from “sales price” when separately stated on the invoice given to the consumer. Example: Federal Excise Tax on Communications (FET)
Federal taxes/surcharges that are imposed upon the seller or treated as a “cost of doing business” to the seller are included within the sales price, regardless of whether such taxes are separately stated on the consumer invoice. Example: Federal Universal Service Fund (FUSF) Surcharge
[Streamlined Sales Tax Rules and Procedures – Rule 327.9]
Again, these are just general rules and are not necessarily the rules that every state applies. In order to properly calculate tax-on-tax you must know how each state you do business in treats things like franchise fees, FET, Right of Way fees, and e911 fees as they relate to gross receipts for the purpose of taxation.
If you feel confused or overwhelmed, don’t feel bad. This certainly isn’t “the flat tax”. The topic is confusing and overwhelming. But, if you are a VoIP provider, you have a duty to collect and remit taxes no matter how difficult the process.
Coming soon... Mistake #3.