The 4 Steps to Sales Tax Compliance Begins with Registering with the Appropriate Taxing Authorities
We’ve spoken with thousands of companies of all sizes that are looking to sell communications services but are having difficulties with the communications tax compliance requirements.
The common thread to these conversations is that communications tax compliance is complex. However, communications tax compliance looks less complex when you break it down into the four major processes. In this post, we’ll look at the first step in the compliance process – registration.
Registration serves a basic purpose, it provides notice to taxation authorities that your business intends to sell serves within their jurisdiction. This enables the authorities to build the roll of companies from which they expect to collect tax. Periodically, you may need to renew your registration. This enables those authorities to keep their rolls current by identifying those companies that continue to maintain their registration as opposed to those that do not.
Using these rolls, taxation authorities can schedule audits to ensure they are receiving the appropriate amount of tax and fees for the transactions that have taken place within their jurisdictions. These rolls also keep the taxation authorities from having to continuously search for companies that provide communications services.
To encourage registration, taxation authorities will impose fines for doing business within their jurisdictions without having registered. A word of advice – the one thing that you should always do before you sell communications services is to register with the appropriate authorities.
Tax authorities exist at the federal, state and local level with jurisdictions that largely follow political boundaries. There are also special tax districts (tax improvement districts and fire districts, for example) that fall outside of political boundaries.
Communications services are regulated to varying degrees by federal authorities. As a result, various regulatory fees are assessed on the communications service provider. The most common regulatory fee is the USF (Universal Service Fund) which is administered by USAC (Universal Service Administrative Company). The USF fee is calculated by applying a contribution factor to the assessable revenue.
An experienced communications attorney can help identify which of your revenues are subject to federal USF and other FCC funds and fees. The most common registration requirement at the federal level is with USAC, the administrator of the USF and data collection agent for other programs. USAC is a private corporation operating under the oversight of the FCC. When you register with USAC, you will receive a Form 499 Filer ID and will be designated as either a direct contributor to the USF or not.
In addition to the federal regulatory requirements, there could be additional state level regulatory requirements. Within each state, there is a Public Utility Commission or a Public Service Commission that is responsible for regulating communications services. Take note that if your service is regulated at the federal level, that does not mean your service will also be regulated at the state level. If you are providing service in a state that does regulate your service, then you will be responsible for paying additional state level regulatory fees that you may be allowed to recover from your customers. A communications attorney can help identify which of your revenues are subject to state level USF and other fees.
If your service is regulated by the states where you anticipate providing service, then you will need to either register with or obtain an appropriate license from the respective Public Utility or Public Service Commissions. Most states require local exchange providers to obtain a license. Registrations for transactions tax purposes at the state level are generally via the state’s Department of Revenue.
Most companies register proactively in states where they anticipate revenue. This might include their home state and other states where they expect significant revenue. Companies will then monitor the collection of tax and based on where they collect, they will then register reactively and immediately start remitting. Certain cities and counties may also require local registrations.
At Wolters Kluwer, we can help guide you through the maze of communications tax compliance. CCH SureTax Communications makes tax calculation easy and with our network of partners, we make the other steps of communications tax compliance easy as well.
To learn more about communications tax compliance, download our free guide, “4 Steps to Communications Tax Compliance”.