Are You Accurately Taxing Your IoT Solutions?

Understanding when Internet of Things devices and systems become subject to communications taxes and regulatory oversight can be difficult to ascertain, putting companies in a challenging and potentially costly tax predicament.
By Tony Susak
Nov 28, 2017

There is much that can be predicted about the future of the Internet of Things (IoT). For example, based on various forecasts, we believe that the total number of IoT connections is likely to reach 27 billion in 2025, and that $6 trillion will have been spent on IoT solutions between 2016 and 2021.

In the midst of this predictable promise for the industry, there's another side of IoT projects that's much less established. Understanding when IoT solutions become subject to communications taxes and regulatory oversight is a complicated, and can put companies in a challenging and potentially costly tax predicament.

Taxable IoT vs. Non-taxable IoT
At the core of this issue is the "I" in "IoT." Because many IoT projects rely on a bring-your-own-internet (BYOI) model, it's often unlikely that adding an IoT device to an existing network will have an impact on communications taxation. However, in an increasing number of instances, this BYOI model is not being leveraged, particularly in applications such as agriculture and industrial. For these IoT offerings and others like them, it's important to note that taxability changes once a device is supplied with its own dedicated data connection.

This means it is becoming increasingly important to pay close attention to the legal definition of "internet access" from a communications tax perspective. State and local governments have been prevented from taxing monthly payments made to internet service providers, or ISPs, under the Internet Tax Freedom Act (ITFA), a three-year moratorium that was extended several times before being made permanent in 2015.

However, while this longstanding legislation and the nature of many consumer-focused IoT solutions has caused companies to become accustomed to non-taxable IoT, things are starting to shift with a growing number of standalone IoT connections on the horizon.

Determining the Taxability of IoT Projects
For a device's data connection to count as tax-free "internet," it must allow a connection to the World Wide Web for such activities as browsing, streaming or launching apps. If the connection fails those tests and is simply being used to transmit data to and from the device, there's a good chance the connection will not fit the legal definition of an ISP service.

For example, consider how the smart thermostat uses home or business Wi-Fi to communicate with a smartphone for remote access. Although there's no additional Web functionality and no Web browsing associated with the thermostat itself, it's using a BYOI connection to function. For this reason, the addition of the thermostat to the owner's network is unlikely to create any tax implications.

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