Understanding VoIP Tax Compliance

As a reseller, sales 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. 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 telecommunication and VoIP providers, and how you can easily handle them.

What Every Business Needs to Know About VoIP Tax Compliance: An Overview

First, it’s important to know that 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.

Some of the line items that VoIP tax compliance requires include:

Regulatory Compliance Recovery Fees

The FCC regulates telecommunications and VoIP services, and there are a wide variety of compliance requirements, state or local programs VoIP providers must accommodate (such as the Telecommunications Relay Services [TRS]), regulatory fees, and other costs as a result of FCC regulation. To cover these costs, VoIP providers charge a small percentage of a customer’s bill either as a separate line item or as part of a bundled fee.

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 on a quarterly basis, it can increase or decrease over time.

Related: Why You Should Explore VoIP Reseller Opportunities

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.

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.

Additional Fees

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. 

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

Tax compliance is just a small part of your business. The bulk 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 tax compliance obligations can be incredibly costly. Failing to meet your obligations 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:

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 must manage. What you can do, however, is choose a services partner that aligns with your brand values and that already has processes in place for staying on top of tax obligations. 

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

Also, you can choose a partner that uses tax and billing software that streamlines 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 a wide array of locations. These platforms can calculate taxes for each client bill over time, manage collection, and ensure the tax funds are sent to the right destination.

Not only does this make the process simpler for your own team, but it cuts down on administrative costs, and you can pass those savings on to your clients.

2. Be Transparent with Your Clients and Business Partners

Just like many resellers are unaware of the complex tax obligations that VoIP service providers and telecommunication 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. This can take the form of:

• Providing example invoices during the sales process so prospects can ask questions about different fees
• Breaking down anticipated monthly costs and how they compare to the base rates you charge
• Providing informational resources about different taxes in each client’s state, compliance obligations, and programs that required fees go to
• Making 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

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

Keeping your team and your customers informed about upcoming changes in taxes is essential, both for collecting the right amount of funds and for being a reliable services provider. 

Related: Navigating the VoIP Reseller Program Market: How to Choose the Best One for Your Customers

For example, inform customers in states like Illinois, Virginia, and California about changing tax rates, or 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.

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

Ultimately, no matter how clearly you display tax information or how painless you make the payment process, your clients will not want to pay fees that outstrip the benefits that your services provide. So it’s important to 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—and being treated fairly—they’re more likely to remain lifelong customers.

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. 

Get started today to see how VoIP tax compliance is easier with SkySwitch.