The Tax Complexities of Diverse Service Bundling
Diverse offerings, like bundled services your business clients may feature, can be attractive to consumers, but the tax implications can get complicated. Moreover, some of these services may even present the same tax obligations or associated regulations.
Communications tax is different than regular ol’ sales tax, which is typically based on a straightforward rate, though it’s not without its own complexities. Communications tax, on the other hand, involves a motley bag of taxes and fees ensnared in copious regulations set at the federal, state, and local levels.
When a business then patchworks extraneous services into one package, they can spawn a new level of convolution. No longer are they working within the known tax confines of their own industries.
Streaming taxes are relatively new and harbor myriad fees — public utility, regulatory, etc. However, some companies that offer these services don’t realize they’re on the hook for communications taxes. But the burden is always on the organization to know its tax obligations and properly file.
Knowing the tax liabilities is a tricky, continuous endeavor with ever-evolving changes in state and local regulations and definitions. Several states have redefined communications tax eligibility, and others are on their way. Every state has its own take on communications and video taxes.
For example, streaming providers are liable for utility and communications tax in lieu of sales tax in some locations. Other states tax content downloads but not streaming subscriptions, and yet others do the reverse.
And of course, as we mentioned, taxes get even more complicated when you have a jumble of services in your bundle and can go in different directions depending on whether you offer the service as over the top (OTT) or as a network provider.
Tax authorities in Iowa announced Amazon’s video streaming services meet their definition of “pay TV” and therefore are subject to its associated taxes. But in Iowa, if one service is declared taxable, then the whole bundle becomes tax eligible.
With that, Prime memberships in Iowa were obligated for sales and use tax just because of the Prime Video component. Similar fates can befall cell phone providers that offer streaming services as part of a bundle.
You never know what alterations or regulations state and local governments will spring on companies as industries, technologies, and business models evolve.
Here are four strategies to help organizations plan for and address fluid and complex taxes that may lurk in disparate services bundles.
1. Monitor Tax Forecasts
Tax rules and regulations can change like the weather. Closely track all jurisdictions across service areas. This may require extra resources, including automated software to help keep abreast of changes, but it will be well worth the effort to avoid detrimental audits and other repercussions. Tax authorities expect organizations to know when modifications are made and harbor no sympathies for those that don’t.
2. Be Thorough and Deliberate
A growing business can potentially face hundreds of divergent taxes and regulatory filings, which can be quite complicated. Take the time to understand each jurisdiction’s requirements and definitions.
Don’t assume one is like the other; they may vary greatly or be quite similar yet with one minor but significant difference.
Connect with other industry leaders to share knowledge and information. Also, document your documents and data in the event of an audit. Be thorough.
3. Sync Your Marketing and Tax Teams
Don’t let anxious marketing teams get ahead of the tax team’s efforts. Make sure all tax obligations are understood and able to be addressed before your client markets new promotions. The sooner you’re aware of all tax liabilities and road bumps, the less time will be wasted on backtracking or reevaluating proposed offerings.
4. Prepare Your Billing System
Standard sales and use tax billing systems generally can’t manage complex communications taxes. Also, your client may not want to add random blanket charges to cover taxes — that could backfire and set them up for litigation. Seek out dedicated communications tax systems to ensure they’re compliant and accurate every step of the way.
Branching out and bundling new services can help a company grow and boost customer satisfaction. But with that expansion comes tax complexities, particularly for communications and streaming services.
Take time to understand and explain the tax intricacies of your clients’ respective industries. And if they plan on offering services from another industry, be sure to get familiar with those tax parameters as well.