The Impact of Economic Nexus on VoIP Services

The rapid growth of VoIP services has raised many questions about how these new technologies should be regulated in light of the traditional regulatory frameworks. Many states have begun to push for economic nexus legislation, which would require a company that does business with their state or offers products and services within their borders to collect and pay sales tax on those transactions. With this type of regulation, companies will need to consider carefully whether they are required by law to collect taxes before determining what is best for their business strategy, especially for VoIP Services.

Does Economic Nexus Exempt VoIP services?

Many businesses rely on VoIP services. These companies may not be aware of how economic nexus affects their business. This nexus occurs whether the service or product is provided by a commercial entity or an independent contractor. The effect of economic nexus on VoIP services is not simply substituting one company’s low price for another company’s higher one. It is often harder for consumers to understand why they should pay more for a quality service from one company than another that might charge less locally.

VoIP Tax Implications With Nexus

It costs money to operate a business, and VOIP is no different. The difficult part for many providers is that the tax burden can be high, especially when providing services across state lines or internationally. When you add in things like sales taxes, income taxes, property taxes, etc., it becomes easy to see why some smaller providers may not want to expand into other markets due to the greater risk of taxation.

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Other Challenges with Economic Nexus Rules: VoIP Providers Need Clear Guidance on Taxation Requirements

There needs to be more clarity around what specific rules apply so that there aren’t any surprises after the fact of how much someone owes at the end of every year. Otherwise, people will find themselves facing stiff penalties.

For example, if you are a small company in Texas and your office is located in the downtown Dallas area, but you provide service to clients throughout Louisiana, then taxes on your profits can be high depending on how much business you do with those customers. If it’s just one or two hours per week, there may not be any tax liability at all because states follow specific guidelines for what counts as nexus. However, if it’s more than that (even though technically enough), then some form of taxation will likely apply – even if they’re outside your home state.

Some jurisdictions have created an economic nexus threshold, which means companies make sales within their jurisdiction above a certain amount before calculating and submitting sales tax reports.

VoIP Tax implications without Nexus

The importance of economic nexus in the VoIP industry can not be understated.VoIP industries have seen significant economic disruption in recent months. Imagine all the free capital that’s suddenly available to developers.

In the VoIP industry, however, there are potential challenges that exist. For example, if your business doesn’t have nexus in a particular state or country and you offer services to customers who reside in those states or countries, then we would need strict compliance with local tax regulations, which can be difficult if you don’t understand what applies where your customers reside or how they work across different countries. The cost associated with providing these types of complicated service offerings can often outweigh any benefits. To avoid this risk, we recommend reviewing our white paper for more information on international taxation responsibilities related to VoIP industries.

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Some people may argue that economic nexus is an outdated concept given digital innovation, but it will play an important role in economic nexus.

What are the next steps for providers to prepare and address the anticipated new sales tax responsibilities?

As suppliers begin to plan and prepare for sales tax collection on VoIP services, it’s important to understand your business needs. We’ve outlined several steps below to help you prepare for potential new tax challenges. For those providers already collecting sales tax, current reporting methods will likely enable you to pretty easily meet your reporting obligations going forward. For providers looking to begin collecting sales tax on VoIP services, there are several steps you can take to prepare for additional reporting requirements. The IRS has recently notified several tax preparation and consulting firms that they will begin sending out notices to certain types of VoIP service providers later this year.

Steps to Prepare for Additional Reporting Requirements:

  • Update your business records
  • Register with the IRS and take advantage of exemptions if they apply.
  • Contact a tax professional or CPA specializing in VoIP services taxes and those specializing in-state sales tax regulations.
  • Get acquainted with how states calculate estimated use taxes on service providers and what it means for you when filing quarterly reports online or by mail (in some cases).
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Some states are phasing out their collection systems, so this will be something you’ll have to keep up with from year to year based on legislation changes. Ensure contact information is available where applicable, including vendor website address and phone number(s).

Understanding VoIP and Economic Nexus

Now looking at the newer generation of VoIP services and most cell phone plans where international roaming is included, it’s easy to see how economic nexus can play an even bigger role in dialing into vital business processes.

The progress of economic nexus has been largely concentrated in the US with direct regulatory actions on VoIP services coming from states, localities, and even individual carriers. One of these rules that came down not too long ago as part of an FCC order in 2008 created specific exceptions to 911 regulations for VoIP providers. This was done because many emergency responders were unwilling or unable to offer adequate service if they had only traditional phone networks available due to the difficulty related to locating caller locations using those systems. There are also cases where regulators have taken action against one provider but then allowed another similar provider by creating exemptions within policies, such as when California exempted Skype on their Frugal Rules list while banning Vonage at the same time.

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