It should be obvious that 5G is a transformative technology, poised to impact nearly every industry with enormous advances in connectivity. Theoretical until now, many are waiting to see what the first 5G networks can facilitate in terms of groundbreaking new technologies. On the horizon is the promise of both consumer and business applications that could change the game in personal experience, productivity, safety and many other ways.
The effect of 5G networks specifically on the Internet of Things (IoT) is expected to be tremendous as the infrastructure needed to manage large amounts of data advances. With lower latency decreasing the time it takes devices to talk to each other combined with faster network speeds and bandwidth, 5G will enable new sensor data capacity and usages previously not possible. This boost to broadband capabilities minimizes barriers to accessing, analyzing and acting on sensor data. This will open the door to innovative applications in smart buildings, autonomous cars, industrial automation, agriculture, virtual reality and augmented reality, to name a few areas of potential growth. For example, remote and robotic surgery is becoming more commonplace, immersive sports experiences invite spectators to be on the ground within the game from their own home, and regular delivery of goods via drones or autonomous vehicles is on the horizon.
However, the critical role sensors play in these emerging technologies could lead to unanticipated taxation impacts. Since sensors transmit data, they could likely be subject to communications tax, which is based on use case and not just limited to businesses in the telecom industry. Recognizing the implications of how your business uses 5G-empowered sensors in unprecedented ways is essential to avoiding costly tax surprises and reducing risk – and it isn’t easy. Untangling the nuances of when sensors are subject to communications tax and when they’re not is complicated. For companies never faced with the complexity of communications tax, the first step is knowing what influencing factors play into whether a service is communications taxable or not.
One of the primary tests for communications taxability for IoT is whether you can browse the internet with the device, which would be unusual for a sensor or group of sensors. If not, it likely is communications taxable – but there are many caveats to this. If you are using an existing internet connection to send data, then the scenario is likely not subject to communications tax.
But this is just directional, and the determination to assess communications tax is complex. There are other critical elements that influence how communications tax is applied that a business must be prepared to address.
Bundles
Often services subject to communications tax are bundled together in an offering that also includes services not communications taxable. Knowing exactly which ones to apply the tax to and how much requires comprehension of various rules that can differ by jurisdiction.
Supply Chain
Services using sensors communicating via 5G networks involve multiple companies along an often-complex supply chain. As an example, vehicle telematics touches car manufacturers, technology platforms, as well as billing providers – and it’s not always clear who is responsible for the taxes associated with the communications service.
Variation Across Jurisdictions
Communications tax, like sales and use tax, must be managed across local, state and federal authorities, and it must comply with rules in special taxing jurisdictions. With differences in how communications tax should be applied across thousands of jurisdictions, keeping track can be overwhelming.
On top of the volume of jurisdictions to navigate, taxing authorities are working to keep up with evolving business models and the technology that drives them. However, innovation moves faster than they can, so communications tax law has been known to change suddenly and drastically to try to catch up. With internet connectivity built into more devices and the exponentially growing number of sensors in place to communicate data, these often data-intensive applications may encounter a variety of unexpected communications tax implications.
Many of the innovative uses of sensors could be communications taxable, particularly in the non-consumer space. New entrants to the space must get up to speed quickly in a complex and shifting landscape. Since several of these businesses are very much outside of core telecom and are only used to sales tax, they are entering a very new and complex world.
As governing and regulatory bodies work to keep pace with technology growth, laws change frequently, making it difficult for companies to stay ahead of updates. Whether tax is applied or not adds another complication and varies depending on connectivity method, among multiple other factors. With decreasing tax revenues coming from traditional sources, authorities may soon be searching for replacement revenue. If you’re using sensors in IoT, you may want to evaluate whether your business might be subject to communications tax and prepare early to stay compliant, reduce errors and minimize audit liabilities.
About the author
Tony Susak is a General Manager at Avalara for Communications. He 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.