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

In contrast, an in-the-field farm-monitoring device, used to communicate real-time data regarding topography and temperatures, might rely on air cards to transmit data. The device uses its own designated cellular-based internet connection, without access to the Web, opening up the argument that this data connection is part of a private wide-area network (WAN) that may be subject to significant tax and regulatory obligations.

It's not just agricultural and industrial equipment that stands to be impacted by the shifting winds of IoT taxability. There are many instances when non-traditional telecommunications companies head into the telecommunications space as the result of an innovation—often without even realizing it. As an example, consider the development of the hot new category of consumer devices designed to support video chat. To determine whether a new IoT project such as this is likely to be subject to communications taxes and regulations, it's important to answer questions such as:

• Does the new IoT device offer the capacity for making phone calls?
• Could the sale of a new device be potentially viewed as the sale of a cell phone or video conferencing equipment?
• Will there be an additional monthly fee to use the video chat service?
• Will the service use Bluetooth to synch to current cell phone monthly data plans? Or will it leverage existing VoIP services through existing internet providers?

The answers to these questions and others like them can lead to very different tax treatments. Understanding when an IoT project is subject to oversight is critical to remaining compliant and preventing costly audits and penalties.

These are just a few examples, and many cases aren't clear-cut. Overall, it's important to avoid falling into the trap of assuming a connected device won't be subject to state communications taxes or federal regulatory fees (and vice versa). Remaining compliant requires staying up-to-date on the latest federal and state tax law developments and definitions with each new innovation. As companies race to invest in IoT-related offerings, failure to adequately address the potential impacts of communications tax compliance up front can lead to misinterpretations—not to mention otherwise avoidable fees and penalties.

Nothing in this article is intended to provide tax or legal advice, including legal opinions, tax opinions or tax management advice. Readers should conduct due diligence and seek the assistance of a qualified legal, tax or accounting professional.

Tony Susak joined Avalara in March 2017 as the general manager of Avalara's Communications Business Unit. Prior to joining Avalara, he served as the director of tax for AT&T, where his team had responsibility for calculating, filing and remitting millions of dollars annually across every jurisdiction in the United States and many jurisdictions abroad. Prior to AT&T, Susak held similar positions with Cricket Communications, Cingular Wireless, Virgin Mobile and General Motors' OnStar division. In these roles, he also helped to develop policy and influence legislation involving vehicle telematics and communication taxes. Susak holds an MBA with Distinction from the Keller Graduate School of Management and a Bachelor of Science degree in accounting from Indiana State University. He is a member of the American College of Forensic Examiners.

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