Understanding VoIP Tax Compliance

As a reseller, sales, tech support, and marketing may be your day-to-day priorities. But the other aspects of your revenue operations are just as important for giving your clients the VoIP services they need. One key aspect of providing VoIP services and ongoing account management is good billing and financial practices, and that includes VoIP tax compliance protocols.

Various regulatory bodies, such as the FCC and IRS, play a crucial role in defining the compliance landscape for VoIP services. The tax burden—or, more specifically, the compliance fees, surcharges, and tax burden—on VoIP companies can hover on or over 30%. This can be shocking to both new providers and new clients.

Managing tax compliance is all about keeping everyone informed, streamlining your management processes, and staying on top of potential changes. Learn more about the unique tax obligations for reselling VoIP services, and how you can easily handle them.

What Every Business Needs to Know About Telecom Tax Compliance and Costs

VoIP services have different tax situations than most other software and tax services. The VoIP industry, like the traditional telecommunications industry, faces extra regulation and attention—and, as a result, extra taxes. These taxes and surcharges can differ across local, state, and federal levels, and the taxes resellers need to collect may differ for each client based on their operation’s location and other details. The taxes and fees may also change each month as tax regulations change. To ensure regulatory telecom tax compliance, VoIP providers must stay informed about changes in regulations and implement effective strategies.

Regulatory Framework for Communications Tax Compliance

Navigating the regulatory framework for VoIP tax compliance is complex and varies across different regions. In the United States, the Federal Communications Commission (FCC) regulates VoIP services. The FCC mandates compliance with various regulations, including those related to 911 services, disability access, and number portability. Additionally, the Internal Revenue Service (IRS) is responsible for collecting taxes from telecom companies, adding another layer of regulatory requirements for providers to manage.

Across the Atlantic, VoIP providers in the European Union must adhere to the General Data Protection Regulation (GDPR), which imposes strict rules on the protection of customer data. The EU’s Electronic Communications Code sets out specific rules for the provision of electronic communications services, including VoIP, ensuring a standardized approach across member states.

Taxation is another critical aspect of communications services tax compliance for VoIP providers. In the U.S., telecom service providers are required to collect and remit taxes on VoIP services, which can include state and local sales taxes. In the EU, VoIP providers must navigate the complexities of value-added tax (VAT) regulations, ensuring they collect and remit the correct amounts based on their customers’ locations.

Regulatory Compliance Recovery Fees

The FCC regulates telecommunications and VoIP services, and VoIP providers must accommodate a wide variety of compliance requirements, state or local programs (such as the Telecommunications Relay Services [TRS]), regulatory fees, and other costs.

To cover these expenses, including federal excise tax, VoIP providers charge a small percentage of a customer’s bill, either as a separate line item or as part of a bundled fee. A well-resourced compliance department can help VoIP providers manage these requirements effectively and avoid potential penalties.

Payments to the Federal Universal Service Fund Fee

Under the Telecommunications Act of 1996, VoIP providers pay a contribution factor established by the Universal Service Administrative Company. This contribution factor goes to the Federal Universal Service Fund, a pool of money created to provide affordable phone services across the country. Because the fee is determined quarterly, it can increase or decrease over time. A compliance officer can oversee the accurate calculation and timely payment of these contributions, ensuring adherence to regulatory requirements.

VoIP providers can manage this obligation as a pass-through fee and bill clients accordingly. Another option is to group this obligation as part of increased rates rather than marking it as a separate line item.

Compliance teams play a crucial role in managing these obligations and ensuring that all fees are accurately billed and collected.

E911 Service Fees

Part of the taxes and fees collected from or through telecommunications and VoIP providers go toward the maintenance of local 911 and emergency call infrastructures. Providers must also directly provide emergency call services to customers. Ensuring the security of emergency call infrastructures is also critical to prevent data breaches and protect sensitive customer information.

Additional Fees and Communications Services Tax

Some additional taxes and surcharges that VoIP providers collect from their customers include state and municipal taxes for:

• Hosted telecommunication and fax lines, licenses, and similar services
• Equipment
• Additional funds for state and municipal 911 infrastructure

Because all of these taxes and fees can vary widely, having transparent tax collection processes and investing in technological solutions to calculate the right fees for each customer is essential. Investing in technological solutions can help VoIP providers accurately calculate compliance costs and ensure transparent billing for customers.

Compliance Costs and Their Impact

Compliance costs refer to the expenses that businesses incur to adhere to regulatory requirements. These costs can be substantial, particularly for small and medium-sized enterprises (SMEs). Compliance costs encompass a wide range of expenses, including salaries for compliance officers, investments in new systems and technologies, and the time and resources spent on training and education.

In industries with high regulatory requirements, such as financial services, compliance costs can account for up to 10% of a company’s total expenses. This can create a competitive disadvantage for SMEs, which may struggle to allocate the necessary resources to meet their regulatory obligations.

The rising cost of compliance can also impact a business’s ability to innovate and grow. Funds that could be invested in new products, services, or market expansion are instead diverted to meet tax and regulatory compliance. Finding efficient and cost-effective ways to manage compliance ensures that businesses can remain competitive while fulfilling their regulatory obligations.

How to Manage Telecom Tax Compliance as a VoIP Provider or Reseller

Tax compliance is just a small part of your business. Most of your time and attention should be spent growing your business: reaching out to new prospects, closing deals, and maintaining good relationships with your valued clients. However, ignoring compliance obligations can be incredibly costly. Failure can lead to hefty fees or being fined steep penalties for non-compliance. Unclear tax and billing policies can also fracture and frustrate relationships with your clients if they suddenly face a higher bill than expected.

But you can proactively take steps to ensure your business manages VoIP tax compliance and that your customers are fully aware of their own obligations. Follow this four-step process:

Step 1. Choose a Partner That Streamlines Tax Management

As a reseller, you don’t have control over every aspect of the services you sell or the processes your clients manage. What you can do, however, is choose a partner that aligns with your brand values and has processes in place for staying on top of tax obligations.

For example, you can partner with a telecommunications provider that clearly outlines each fee, tax, and surcharge, giving you a detailed outline of different fees and what the money is going toward. A clear breakdown can demonstrate honesty and integrity while resolving any concerns about aggregate bills.

Choose a partner that uses tax and billing software to streamline the entire process. VoIP services providers that utilize Rev.io or Datagate, for example, can cut down the costs of manual tax calculations and eliminate the risk of human error in managing tax assessments for clients across locations. These platforms can calculate taxes for each client bill over time, manage the collection, and ensure the tax funds are sent to the right destination.

Some white-label UCaaS providers even handle the billing and taxation for you. With a simplified process, it cuts down on administrative costs, which you can pass on to your clients. Using advanced tax and billing software helps reduce communications tax compliance costs and improve overall efficiency.

Step 2. Be Transparent with Your Clients, Business Partners, and Compliance Officers

Just like many resellers are unaware of the complex tax obligations that VoIP service providers and telecommunications companies have, clients and business partners may be unaware of the added fees or financial complications. Being upfront can go a long way to strengthen the relationship.

• Provide example invoices during the sales process so prospects can ask questions about different fees.
• Break down anticipated monthly costs and how they compare to the base rates you charge.
• Provide informational resources about different taxes in each client’s state, compliance obligations, and programs where required fees go.
• Make it easy for clients to see the taxes and pass-through fees, either as a report on their account or as distinct line items on each bill.

Compliance cost refers to the expenses incurred to adhere to regulatory requirements, and being transparent about these costs can build trust with clients.

Step 3. Stay on Top of Regional Tax Specifics and Changing Tax Norms

Keeping your team and customers informed about upcoming tax changes is essential for collecting the right amount of funds and being a reliable service provider. Staying informed about changing regulations can help VoIP providers manage regulatory costs and avoid unexpected financial burdens.

For example, inform customers in states like Illinois, Virginia, and California about changing tax laws and rates. Likewise, inform all of your customers about the quarterly changes to the Federal Universal Service Fund charge as soon as the FCC approves the new rate. Keeping customers informed about changes can help them understand and manage their telecom tax compliance costs effectively.

Step 4. Ensure Your Clients Receive Enough Benefits to Warrant the Taxes

No matter how clearly you display tax information or how painless you make the payment process, your clients won’t want to pay fees that outstrip the benefits that your services provide. Regularly review clients’ services, find opportunities to solve their pain points, and ensure each client is getting optimal customer service.

When your clients are satisfied that they’re paying fairly, they’re more likely to remain lifelong customers. A compliance officer can help review services and ensure they’re receiving the benefits that justify the telecom taxes they pay.

Compliance Challenges and Solutions

Compliance challenges are a common hurdle for businesses, often arising from changes in regulations, limited resources, and inadequate training. These challenges can lead to increased compliance costs and the risk of non-compliance, which can result in significant penalties and damage to a company’s reputation.

Automation

One effective solution to these challenges is automating compliance processes. By leveraging technology, businesses can reduce manual errors, increase efficiency, and ensure that compliance tasks are completed accurately and on time. Automation tools also help businesses stay up-to-date with regulatory changes, automatically adjusting processes to remain compliant.

Training

Ensuring that staff are well-informed about compliance requirements can help prevent mistakes and improve overall compliance rates. Implementing a comprehensive compliance management system can further streamline processes, providing a centralized platform to track and manage obligations.

Outsourcing

Outsourcing compliance functions to specialized providers is another viable option, particularly for SMEs with limited resources. These providers have the expertise and tools to effectively manage compliance, reducing the burden on internal teams. Additionally, conducting regular risk assessments can help businesses identify potential compliance risks and take proactive steps to mitigate them.

VoIP Tax Compliance is Easier with SkySwitch

Choosing the right vendors and selling partners based on the services they provide is essential. It’s just as important to find a partner that provides excellent administrative, financial, and professional infrastructure.

At SkySwitch, we make managing tax obligations a seamless part of being a communications reselling partner through automated calculations and collection. Our compliance teams are dedicated to helping resellers manage their tax obligations efficiently and effectively, giving you a competitive advantage. Get started today to see how VoIP tax compliance is easier with SkySwitch.