Taxing the Internet of Things

Published on 09 Feb 2021

Taxing the Internet of Things whitepaper

The growth of the Internet of Things (IoT) is staggering. According to industry estimates, $6 trillion will be spent to connect 24 billion IoT devices to the internet by 2020. IoT is predicted to be the largest device market in the world by 2019 — more than double the size of the smartphone, PC, tablet, connected healthcare, and wearable markets combined. Far from a consumer-only technology revolution, IoT stands to transform the very nature of numerous industries ranging from agriculture to manufacturing to transportation to oil and gas, to name just a few. Farmers are using connected devices to meet food demands, manufacturers to unlock operational efficiency, and fleet managers to monitor everything from carbon emissions to driver fatigue. There are smart homes, smart buildings, smart cars, smart factories, smart surgical equipment, and smart energy grids. Every day seems to bring a new IoT innovation; each month another provider promises to help change the world by tying more things to the internet.

But as more “dumb” objects become “smart” by way of the internet, the question of taxation stands as a roadblock threatening to halt the progress of unprepared providers. The reason: IoT is opening another door — the one that has lawmakers and regulators evaluating when new services, software solutions, and hardware models become subject to communications taxes and federal regulations. Yet many companies investing in IoT solutions remain unaware that creating those connections can completely change the taxes they’re liable for and regulations they’re subject to. Such oversights have the potential to turn profitable revenue streams into costly headaches due to increased risks of penalties, fees, and audits. In this whitepaper, we address core components of the communications tax implications of IoT, including the need-to-know basics of:

  • The definition and breadth of the IoT industry
  • How IoT fits into current tax legislation
  • Determining IoT taxability
  • Managing growing complexity through automation

With so many companies entering the IoT market, America’s governing bodies are starting to take note. When internet connectivity comes built into a device, the possibility that services, software, or hardware (or all three) will trigger communications tax liabilities increases exponentially. These types of taxes are among America’s most complex, yet many manufacturers and retailers remain unaware that selling IoT devices means they may be obligated to understand and comply with them. The problem is magnified by the fact that so many governing and regulatory bodies are struggling to catch up with IoT technology as it advances at a rapid pace. As a result, communications tax laws change frequently — meaning a product or service that had never before been subject to communications taxes may suddenly fall within the realm of federal and state regulations. This can make for major challenges as growing companies attempt to master communications tax compliance. The big question on everyone’s mind is: When does an IoT offering become subject to communications taxes and regulatory oversight? In many ways, the answer could depend on the very definition of IoT.


Learn more about how IoT is defined and Avalara can help organizations ensure they comply with changing communication tax requirements. For more fintech whitepapers, subscribe to


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