Communications Tax Impacts of VoIP Services
Published on 10 Feb 2021
Voice over Internet Protocol (VoIP) is officially everywhere. From conference rooms to living room couches, it’s become a communication method of choice — both at home and at work. Tens of millions of users rely on an array of VoIP-powered services, from audio conferencing to video chats to digital calls, to meet with remote employees, communicate with clients, provide customer support or simply catch up with friends and family.
The drive toward VoIP services is here to stay. Depending on the type of service, there are often no complicated phone bills to worry about, no long-distance calling fees, and little equipment to invest in. For users, VoIP is a hassle-free, simple solution. However, the same cannot be said for VoIP providers— particularly when it comes to taxes and regulatory fees. There is an array of variables that can impact tax determination, calculation, and, ultimately, compliance. And as state and federal regulators continue to scrutinize the service, additional regulations further complicate what’s already a complex process. This white paper serves to help VoIP providers understand what’s at stake from a communications tax perspective and plan accordingly
VoIP Defining Factors
At its core, VoIP is relatively easy to define. A system for converting voice analogue signals to a digital format that can travel over the internet, VoIP makes it possible to conduct voice calls using a work or home internet connection. Some VoIP services allow users to call others using the same service; others enable calls to virtually any long distance, wireless, or international phone number. While many of these calls are made from computers, they can also be made from special VoIP phones, traditional phones with adapters, and wireless phones. But while the method for delivery may differ, the overarching service is the same. From a tax perspective, the definition of VoIP gets murky. This is because the type of communications tax (and regulatory fees) that apply can vary greatly depending on the ways the service is provided. Namely, there are two key elements that impact many federal and state tax liabilities:
1. Static VoIP Versus Nomadic VoIP
With static VoIP, calls are made from a fixed address, such as a private communications network, that makes it feasible to identify the origination point of VoIP calls from that service location. Static VoIP often uses physical infrastructure installed at the premise on a semi-permanent basis. With nomadic VoIP, subscribers can make calls from any broadband internet connection—meaning a call may originate from, or terminate at, any location. From a tax and regulatory perspective, this can make it impractical, if not impossible, to identify call locations and separate out the intrastate and interstate portions of VoIP services for compliance with state and federal rules and regulations.
2. Interconnected VoIP vs Non-interconnected VoIP
Non-interconnected VoIP, sometimes referred to as “Peerto-Peer” VoIP, is a service that allows the user to contact other users operating the same VoIP software. However, the service does not allow the customer to make and receive calls from the public switched telephone network (landline phones and cell phones). Interconnected VoIP, on the other hand, generally allows users to make and receive calls from a regular telephone network.
Download the whitepaper to read about the tax implication of VoIP and how Avalara can help organizations comply with tax regulations.