Tax on Tax Calculations: Primer for Communications Service Providers

See if this sounds familiar...

Support is on a call with a concerned customer. The voice on the other end explains that, as a former tax accountant, he’s identified some sales tax miscalculations on the latest bill and would like to correct them. The complaint is flagged as a tax rate issue and gets routed from customer support to the tax department.

Eventually, someone down the chain verifies that the rates are in fact accurate, just misunderstood. Neither the person calling nor the support representative recognized that the charges in question were related to tax on tax.

For communication services providers (CSPs), one of the most taxing aspects of taxes is... tax on tax.

It’s challenging to even read the above sentence, let alone gain a strong hold on all that it entails.

The Taxing Nature of Tax on Tax
Even at CSPs where employees have a deep knowledge of the communications services provided, it doesn’t mean they’ll understand how jurisdictions view them for tax purposes. Communications taxation includes some of the most complex calculations in the tax industry. There are jurisdictions to pinpoint, bundled services to untangle and fees and surcharges that may also be taxed.

And then there’s tax on tax that’s often calculated to the diminishing penny as it’s passed on to the customer.

One of the simplest ways to gain a basic understanding of communications tax on tax calculations is to consider Federal Universal Service Fund (FUSF) and Federal Communications Commission Regulatory Assessment. These are fees that providers are usually required to pay and typically pass on to customers as surcharges.

However, once those surcharges have been added to a bill, the calculations are not done. From many states’ perspectives, each surcharge is another fee paid by customers—and they want to be sure they’re obtaining their fair shares of those payments. With the contribution factor hovering around 16-18% in recent years, the sales taxes on those fees alone can add up to a lot of valuable state revenue. If you don’t apply the correct tax rate—and the correct tax on those taxes and fees, and so on—you risk facing a very costly assessment in the event of an audit.

And that’s just for starters. In some states, you might have as many as nine or ten items that are all interacting with taxes on each other.

How Tax on Tax is Calculated
Let’s say your customer’s taxing situs is in Tennessee. The bill for this month includes $100 worth of wireline interstate voice calls. Surcharges are added to cover the company’s FUSF contribution ($18.20) and FCC regulatory fee (33 cents), increasing the bill from $100 to $118.53. Next, state sales tax must be added to the bill. But rather than applying the 7.5% state rate to the $100 fee, it’s calculated based on the new total of $118.53. That’s the first tax on tax (or tax on surcharge in this case):

If you’re billing a customer in a location with county and local taxes and fees, each one may be calculated as another tax on top of the charges introduced by FCC and FUSF fees. And in a more aggressive state like New York, there could be as many as seven or eight different taxes and surcharges that are all getting taxed on each other. It’s no wonder customer support is getting calls from confused customers.

Managing Tax on Tax
Ensuring your back office tax system is set up to accurately calculate tax on tax is a must if you want to remain compliant. Your research team (or your automated platform’s research team) should be constantly studying, validating and updating tax rules and rates to ensure tax on tax is accurately calculated.

As an additional measure, you may want to consider giving your support team limited access to your communications tax compliance software so they can easily look up rates and help prevent misunderstandings among customers.

Are you facing challenges with tax on tax calculations? Find out how Avalara for Communications can help.