In the fourteenth episode of Talking VoIP with Datagate, Mark Loveys is joined by telecommunication tax experts of CCH SureTax (Wolters Kluwer), David Rubenstein and Deena Levi.
This instalment delves into the critical role of a telecom tax engine.
Watch the full episode below:
About Our Guests
David is WK’s professional services team’s telecommunications tax expert. David has decades of experience in the indirect tax space with a specialty in communications tax. David is in charge of SureTax mapping and configurations for communications, and performs consulting services for many of the world’s largest communications companies.
Prior to joining CCH David worked in the CPA industry in the area of direct tax.
David has been a licensed CPA since 1983, and lives with his family outside New York City.
Contact David here.
Deena has over 20 years expertise in tax rates and jurisdictions and is a Senior researcher for various industries, predominately telecommunications.
This entails keeping up to date with the new technologies and the associated tax implications, on the federal, state, and local levels.
CCH SureTax by Wolters Kluwer
The telecommunications industry is one of the most heavily tax-regulated industries. With such industry complexity, it is nearly impossible for telecom companies not to rely on automation software that simplifies communication tax management and creates a solid audit defense.
CCH® SureTax® software, built from the ground up for telecom tax determination over a decade ago and backed by Wolters Kluwer’s expertise, a $5 billion revenue leader in information services, is the most accurate and up-to-date SaaS-based telecom tax engine. Its designated research team is well-versed in providing the most current tax rates and rules and their interpretation for telecom companies. Besides that, the CCH SureTax platform is a highly configurable solution that supports the most complex requirements. This powerful software scales with customer’s growth and takes the burden of tax determination off their shoulders.
With the help of Datagate, the trusted billing partner, CCH SureTax simplifies communication tax and provides telecom companies with a seamless end-to-end experience.
About Talking VoIP With Datagate
Talking VoIP With Datagate is a podcast series for MSPs and Telecom Providers who offer VoIP services to their clients. Join us as we discuss interesting topics including new innovations, regulations, and billing in the VoIP/UCaaS space.
Episode 14 Transcription: The Critical Role Of A Telecom Tax Engine
How many telecom tax jurisdictions are there in the United States?
David Rubenstein 0:49
There’s over 12,000. Our official count is 12,823.
Mark Loveys 00:57
Now to Deena, who’s a senior researcher in this area, do you know what’s involved in keeping CCH SureTax accurately and reliably up to date with all of these 12,000 plus telecom tax jurisdictions?
How do you keep CCH SureTax accurately and reliably up-to-date with these tax jurisdictions?
Deena Levi 01:14
So we actually have a whole process, we have a local team that makes many, many, many calls, every day, every month.
And they also send a lot of emails to try to keep track of what’s changing, what’s current, what’s coming up, what’s new.
We also do a lot of legislative review for any state changes or local changes. It’s a constant process.
A lot of keeping track and then inputting it and double checking it and just making sure we’re currently up to date.
How often did telecom tax rates and rules change? And how much notice do you get of a forthcoming change?
Deena Levi 1:55
So there are some that change, you know, pretty consistently, every quarter or once a year, we know about that.
And there’s some that just totally surprise us.
Things that changed during the pandemic that you know, we didn’t know were coming up, and then all of a sudden, wow, here’s a big change.
And we just have to just keep on top of the news and all the Legislative Review, going through a lot of articles and papers just to see what’s going on.
David Rubenstein 2:18
There’s two months of the year that are heaviest in terms of content updates, that’s January 1st, of course, the year end changes and then July 1st, which we just had.
So generally, jurisdictions, again, on a federal and state level will change either on the calendar or around the semi-annual July 1st.
Local jurisdictions are not bound by that. Obviously, when you’re dealing with 1000s of local jurisdictions, those are much more difficult to track and there’s not necessarily an expected date where that change will take place.
But generally, the major changes are going to be either January 1st or July 1st.
Mark Loveys 3:21
And so, I guess, in the accounting processes, it’s important to keep track of what the current rules are, but also the past rules and rates. So how does cch shoretex keep track of past and present tax rules and rates?
How does CCH SureTax keep track of past and present tax rules and rates?
Deena Levi 3:36
We have very detailed spreadsheets and we do keep track of all the changes that have occurred.
David Rubenstein 3:43
That’s the content.
There’s a two part question Mark.
See, CCH SureTax is comprised of the underlying content. And then there’s the program, you know, the SureTax as a tax engine. So the tax engine will hold several years of data so you can run old transactions.
So let’s say we have a client who perhaps wasn’t compliant in the past and now is perhaps doing what’s called a voluntary disclosure agreement – a VDA – with a tax authority.
So they’ll need to go in and do what the engine does. What the engine does is called Tax Rating. So tax rating means you’ll run a transaction.
Let’s say you’re in San Jose, California, and you have a customer (because everything’s driven off the customer) you’ll run through the record as of a given date, this was the amount of the sale, the tax is determined by what’s called a “mapping” of the service that was rendered to a tax code in the system.
Web mapping creates a one-to-one relationship. And then we run that through the system and coming up with taxes is called Tax rating. So the Pat, the old tax information that’s stored, in SureTax enables a customer to tax rating for the prior period, should there either be an audit that you’re dealing with or a voluntary disclosure agreement.
So keeping track of past rules can be extremely important for a client and in dealing with compliance.
Mark Loveys 5:45
I had no idea you went back so far. That’s great to know.
In terms of what’s currently happening in the telecom tax and regulatory space, are there any recent developments that may be of interest to MSPs who sell VOIP and UCaaS services?
Recent developments in the telecom tax and regulatory space
David Rubenstein 6:05
When we say telecom tax and regulatory space there is various components in the actual legislation.
You know, legislative wheels move slowly.
One of the issues that we have and the difficulties we have in creating content in the telecom space, is that so many of the statutes on the state level, local level are very outdated, very cryptic, not at all keeping up with modern technology.
David Rubenstein 6:50
That said, the number of states that were streamlined etc, you know, SST, have updated.
So it’s kind of a mixed bag, some is updated, some is not, there’s a tremendous amount of analysis and review to just create a baseline in the content.
But once that content is established, the actual amount of legislation, Deena if you are aware of anything that’s happened and say in the past year, that’s monumental in terms of legislation.
My experience has been that, you know, the legislation doesn’t, from one day to the next, have …It’s pretty stable.
But that said, what kind of changes in the ground that are happening is in the enforcement.
As tax jurisdictions have been being pinched, needing more revenue, the enforcement is becoming much more aggressive. Especially in the space where the government sees that there’s an opportunity of creating revenue from non compliant companies.
So there’s more of an attempt in terms of, for example, on the FCC level (Federal Communications Commission US), the enforcement agency is called USAC.
The USAC administers the FUSF (Federal Universal Service Fund) and the other federal regulatory fees, they’ve doubled their amount of auditors.
The states have become much more aggressive on audits.
USAC has become more aggressive in terms of their interpretation of the rules of the FCC.
But it’s a mixed bag, to be honest, because you have the more aggressive and more tools also right. All the other automation, all the computers, all the technology enables an auditor to have more access to information.
On the other hand, a lot of the audit tourists are quite inexperienced, they don’t really know what they’re doing. So you know, it behooves someone who does get involved in an audit to make sure that they have experts because they may be able to outsmart and outfox certainly the inexperienced auditor.
Mark Loveys 9:39
So it seems more important than ever to get taxes right, with the jurisdiction putting so much more resources into it? So at what point does an MSP cross the line? You know, when they start selling voice services, when do they reach the point where they need to start filing telecom tax returns, at what level of revenue for example?
At what point does an MSP cross the line to becoming a telco who needs to file telecom tax returns? At what level of revenue?
David Rubenstein 10:04
There’s two there’s two [components].
One is the type of revenues being generated and who the customer is, and then the threshold of the revenues being generated.
So, as far as the type of revenue, jurisdictions define the word “Communications” differently.
The FCC has its own definition of what’s considered a quote unquote “Communication Service”, and they differentiate that from what they call an “Information Service”.
Something is either communications or information. If it’s communications, it’s subject to the FUSF, the Federal Universal Service Fund at the current rate of 33%.
Or its information service and is non-assessable. That’s the FCC.
The States is a totally different story. The Department of Revenues, in theory, each of them can have their own definition communication service, but generally they’re not at all similar to the FCC, in terms of their defined communication service.
Streamline, this puts a certain uniformity among a number of the states for sales tax purposes and how they defined communications. But there’s still many states not part of Streamline sales tax and a lot of the larger states as well.
And they each have their own definition.
So when we say, when do they cross the line to become a communications provider?
It depends what jurisdiction they’re operating in, and how the jurisdiction defines communications
As far as what the communication is – there’s the what the communication is, does it fit in the box of how that particular jurisdiction defines telecommunications?
And then there’s the whom, to whom are they servicing? So if they’re servicing the end user of the service, then the MSP will be subject to communications tax.
If they’re not selling to the end user, or rather, to a reseller, it would fall under sales for resale assuming that they have the correct documentation of a Sales For Resale.
Now, a Sales For Resale is different for sales tax, as opposed to Federal Universal Service Fund, and other taxes. So, there’s so many different taxes in telecommunication applications, in a high tax jurisdiction like New York or Texas.
In the city of New York, or Dallas, or Houston, there could be a dozen different taxes applying to communication service, each having their own rules
So there may be one rule for one tax or a fee or surcharge, and different for another one….As you can see it is very complicated given that there’s so many taxes that apply.
As far as threshold goes, there’s no rule for that.
I think before we get to the threshold, we want to back up and say situs. Where is the service being located and how does that then create what’s called nexus for the MSP.
These are hobby discussions in of itself would each be extended session.
But the general rule in communications is that the customer creates the Nexus so technically speaking, there’s no threshold.
If you have a customer that is in a particular state or locality, there would be required for registration. As far as what your tax professional recommends, in terms of what is reasonable, because, copies create a tremendous burden and compliance to be filing tax returns of, you know, $1 in a single jurisdiction or state.
So if there’s only one customer it’s a small amount, so that’s kind of like the unwritten rules of how do you how do you manage compliance and that’s something you’d want to consult with your telecommunications professional.
On the federal level, there is a De Minimis threshold for the Federal Universal Service Fund of a $10,000 liability.
So a company who’s clearly crossed into communications would file with the FCC. But if they’re providing a lot of communication service, they would end up falling under the $10,000, they would be De Minimis and therefore, not subject to file with USAC and FCC.
Mark Loveys 15:47
Right. So David, one of the questions we hear a lot is how services like Microsoft Teams, Zoom and other video conferencing systems are treated by the telecom tax authorities?
How are services like Microsoft Teams, Zoom and other video conferencing systems treated by the telecom tax authorities?
David Rubenstein 16:00
That’s a great question.
So in a certain sense, these services are apps, right? So Teams is like an application.
An application is not telecommunications. It’s software as a service.
However, it’s providing communications. One, there’s a voice component, it’s just a bridging/collaboration. It’s just a web collaboration tool without any voice.
So then you get into the question – could you look at it strictly as an app?
Once you’re providing voice communication, then you’re looking at something which is in communication.
The WebEx decision rendered the service for federal purposes to be considered Information Service and not telecommunications.
If your video conferencing service is similar to WebEx, which is not in scope and this call to make a judgment on that, but certainly a legal adviser would be the person to make that call.
But if indeed your video conferencing system falls into the WebEx category, then you would not be subject to FUSF. However, that doesn’t mean you’re not out of the woods in terms of being called Communications by the state and local tax authorities.
We have a separate – in our content in which is part of CCH, which kind of SureTax we have a separate group for video conferencing.
Our position is that it is subject to state and local tax, depending how it’s sold. So whether it’s sold as an integrated system together with the voice, whether it’s sold in component parts…
In general the treatment is communications on a state and local level. But just bear in mind there’s a hierarchy in the US and telecommunications tax and regulatory surcharges.
Whereas the regulatory side, which is one part of the hierarchy. In this particular case was a great example of how this dual hierarchy works.
The regulatory perspective on Teams and Zoom and WebEx is that it’s not subject to Federal USF, but the State locals approach generally is that it would fall under their jurisdiction as a communication service.
These types of companies have had some severe beatings. And from what we’ve kind of heard through the keyhole, in terms of being beat up by tax authorities for not looking at their service as communications and then being slapped down the line with very high assessments, tax assessments and penalties, interest etc.
It can get quite costly. The costs of non-compliance can be fairly severe. And the best, prudent prudent advice is to try to nip in the bud and get ahead of it and deal with it upfront.
One consideration for the off startup MSP is you know, you may be aggressive now, but if you’re not really looking at whether aspects of your service are telecommunications, once you do build up your revenue base, hopefully, quickly, a lot of these companies then set themselves up for acquisition, upon acquisition, there will be a due diligence by professionals who are very familiar with the rules.
And if the startup acquisition candidate is deemed to have failed to be fully compliant, there will be a reserve created, it may likely affect (potentially) the acquisition price, etc.
So, the cost of non-compliance probably far exceeds the cost of compliance in a proactive way.
We strongly advised companies or MSPs, to look at their potential liability upfront and deal with it while it’s small and containable as opposed to letting it just accumulate and become a bit of a monster down the line.