5G and the Internet of Things: Networked smart devices are here, tax policy is sure to follow

Fifth-generation wireless technology continues to roll out across the United States, despite some high-profile hiccups.

If you’ve upgraded to a 5G smartphone recently, you’ve probably noticed an improvement in the quality of your service. As cellphone manufacturer Ericsson explains “4G made cloud services useable on mobile phones, 5G technology takes this to a new level.”

But the big news about 5G has less to do with the things we can do with that device in our pocket or purse. Because where 4G technology was aimed at making smartphones more capable, 5G is designed to provide wireless connections and new capabilities to a whole range of different devices we haven’t previously associated with the internet.

This Internet of Things (IoT for short) already is changing our daily lives: Many of us have smart thermostats, allowing us to turn up or turn down the heat from our mobile phones. Some also have smart garage doors, which we can open or close remotely. And smart doorbells and security cameras allow many of us to see who is coming to our door, even when we’re not home.

We will see more of this kind of conversion at home or at work in the very near future, as 5G enables the rollout of smart lamps and light bulbs, smart tracking systems to improve inventory management, as well as smart HVAC systems and cleaning robots that can change the way office and commercial buildings operate.

The changes the IoT will bring in communications tax policy remain to be seen, however. Taxing authorities seem hesitant to intervene decisively on the key question; perhaps because they don’t want future development in this new industry to be driven by tax policies instead of questions of operational efficiency or business profitability.

The advent of 5G has major implications for business users, particularly in manufacturing and medicine.

According to Siemens, one of the biggest advances will be that 5G enables remote manufacturing operations. You won’t need to have humans on-site to physically operate a machine, and the machines themselves will be able to tell us when they need attention.

“Once you have your devices connected, remote monitoring and asset management can be easily handled from remote locations,” according to the German tech conglomerate. “This IoT business trend increases people’s safety, raises efficiency and reduces costs.”

The healthcare industry also is likely to transform. Instead of going into a doctor’s office for hours-long testing and monitoring, patients will be able to wear devices that track and transmit their vital signs to doctors and alert them if there is trouble, or if a patient needs in-home follow-up care after being released from a hospital.

Agricultural producers already are using 5G technology to monitor high-value crops like grapes. Data collected from vineyards allows winemakers to decide when their vines need fertilizer, irrigation, or fungicides. That enables them to use water and chemicals more efficiently, with less impact on the environment.

At home, things like robot vacuums and smart ovens — even robot mops — are expected to drive more than $30 billion in sales in 2022. It won’t be long before you’re asking Alexa to have your coffee ready the moment you step in the kitchen.

The key question around taxation is how a smart device connects with the internet; that is, whether your smart device or appliance has its own native internet connectivity, or if it relies on a more universal internet connection.

If you’ve got a smart refrigerator in your kitchen, for example, chances are its sensors that can help you with your meal planning are connecting to the internet through your home Wi-Fi system. Internet services are generally not taxed under U.S. law, so the messages your smart fridge sends you over your home Wi-Fi network are likely not taxable, because your device uses “bring-your-own-internet” access, or BYOI.

On the other hand, if your neighborhood park has a smart vending machine selling snacks or sodas, chances are that vending machine is accessing the internet directly with its own hardware and software. Therefore, when it alerts its home office that stocks of a particular item are low or the cash box is full, does that connection still qualify as “Internet Access?”

If the device in question doesn’t contain a human interface for browsing the World Wide Web, does the connection to that device still count as internet access? The potential alternative is that the connection might be classified as LAN/WAN access, which could be subject to a raft of communications taxes and charges, including Federal Universal Service charges. 

So far, the FCC and state authorities have been slow in drawing clear, public lines around these products and definitions. 

This won’t continue indefinitely: At some point, taxing authorities will likely plant a stake in the ground and attempt to capture revenue they are otherwise going to miss. However, if tax authorities do become aggressive in treating IoT connections as LAN/WAN, will that push the market toward selling all devices as BYOI, in order to avoid taxation

For now, here are some good rules of thumb for businesses responding to the growth of 5G:

• Telecom providers should continue to tax communications services, including voice, cable, and data. This also can include content or media like video and some audio.
• If your company is growing, you potentially could expand into a product area or a taxing jurisdiction that imposes a communications tax. Preparing for the effects of this more complex taxing structure should be part of any business expansion plan; you’ll need either to ensure your team and billing platform can handle more complex communications taxes — or find a vendor that can.
• If your services are bundled, there may be some parts of that bundled service that are subject to communications tax, either in whole or in part, in some jurisdictions, but not in others. You’ll need to understand and comply with the requirements in each jurisdiction.

To learn more about managing your communications tax obligations, read our Communications Tax Survival Guide or download our whitepaper on the proliferation of communications taxes and what they mean for your business.

At Avalara, we will continue to monitor changes in communications tax policy related to 5G and IoT. Your business needs to monitor it too, just like your smart refrigerator monitors whether you’re running out of eggs.