Beware! Important Tax, Fee Considerations for UCaaS, CPaaS
Cloud architecture brings a new day to communications, but our tax laws are living in the past... and that could mean an unexpected tax burden for your enterprise.
Here's the top and bottom lines: You could be very surprised by the taxes you'll incur for cloud-based telephony services like unified communications as a service (UCaaS) and communications platform as a service (CPaaS).
The on-premises PBX provides a large amount of communication functions that do not touch the public switched telephone network (PSTN). Even those functions that do require the PSTN connection, or offer PSTN bypass, are concentrated on central office lines or trunks. Thus, the taxes and fees applied at local, state, and federal levels have been negotiated and legislated based on that architecture.
But with UCaaS and CPaaS, station lines and functions traverse the network, too, making them subject to those same tax structures and rates. An enterprise that has a typical 20:1 ratio of stations to trunks could easily see a significant jump in the tax burden if its UCaaS or CPaaS provider just passes the taxes along to customers. In such a scenario you could perhaps expect to see an increase from as low a rate as 0% of your PBX operational costs to as high a rate as 30% of your monthly UCaaS bill.
This is important to understand in advance since, in the end, your enterprise is obliged to pay the taxes. Underpayment could result in significant back-payments and even penalties, if audited.
Of course, the laws may evolve as communications moves to the cloud, but for now we're dealing with tax laws designed around on-premises devices, PBXs, and trunks. (Brings to mind lyrics the Beatles song "Taxman": "If you try to sit, I'll tax your seat... If you take a walk, I'll tax your feet." You get the idea.)
There are some things that can be done, and there are some things that can't be done. Here are a few tips. (Please note, I'm neither a CPA nor a tax attorney, so do consult the in-house or external professionals your enterprise relies on for such matters rather than taking my word exclusively.)
1) Understand the underlying mechanisms. Broadly, communication taxes fall in one of three categories:
- Local and state taxes that are, essentially, special sales taxes -- these vary widely by jurisdiction. In some cases, you'll encounter normal sales taxes plus a communications sales tax or surcharge. If your company has many locations, this can get complex.
- Federal Universal Service Fund (USF) charges -- applied as a percentage of all services that use (or bypass) the PSTN. The big factor here is to be sure the UCaaS or CPaaS provider properly identifies the PSTN-related services so the USF fees are only applied to that portion of the bill. Without such segmentation of the PSTN-related portion, the entire bill may, and likely will, be subject to USF charges. It is also possible to affect the USF charges based on the network design, to the extent that is even possible to change based on the UCaaS or CPaaS offering you are considering or using.
- E-911 fees -- like local and state taxes, these vary widely by jurisdiction. Also, for UCaaS, this usually becomes a per-station charge rather than a per-trunk charge as it is with most PBXs.
2) Get help. In recent experience on this topic, I found a variety of firms offering comprehensive services. Here are some examples:
- CCH SureTax, part of global information services firm Wolters Kluwer, is a leading provider of tax calculation software for assuring optimization and compliance with telecommunications tax regulations and other tax laws. Wolters Kluwer delivers SureTax via a network of value-added resellers, such Global Strategic Accountants (GSA) and ECBWireless, as mentioned below.
- GSA offers communication tax reviews of an enterprise's telecommunications invoices. If you already are using UCaaS or CPaaS services and have been surprised by the taxes on your invoices, these folks can help you analyze those costs and assist in re-negotiating with the UCaaS or CPaaS provider.
- ECBWireless offers invoice review and negotiation assistance.
- Avalara, provides tax calculation software to the communications service provider industry. You'll find some excellent information on its site, including a free (with registration and, of course, a follow-up call) communications tax calculator.
- Tax Foundation, a tax (or non-tax) advocacy group, publishes tax information and seeks to influence legislation. In 2004, the group published this informative tax table to show average communications tax structures by state. It has not updated the data in this table, but you can download detailed tax rate information at Avalara.com (see above).
3) Require tax examples and commitments in your RFP.
By now, it should be obvious that you will want to make tax obligations a factor in any UCaaS or CPaaS procurement and the related financial analysis. Even though the tax laws are essentially fixed in each jurisdiction, the UCaaS and CPaaS providers are inconsistent in how they manage the tax calculations and allocations. One approach is to require the UCaaS or CPaaS bidders to submit sample invoices for some or each of the locations they will serve in your enterprise, showing the tax calculations and explaining the basis for those calculations. These calculations can be reviewed and possibly even negotiated in advance of your procurement decision.
So, beware! Take the necessary steps to understand, get help, and require commitments regarding the taxes that your organization may be obliged to pay on UCaaS or CPaaS services. With solid advanced planning, you can make a well-informed financial decision and avoid unpleasant surprises when the invoices start arriving.
We certainly don't want your communications to be too taxing!