Ever had a bad connection on a video conferencing platform? It can be a confusing and frustrating experience.
That’s a lot like understanding the taxes on videoconferencing services right now. With the recent boom of video conferencing brought on by the necessity of a way to meet during the pandemic, businesses and governments alike are trying to figure out how to best apply sales tax to these services, or if they are even taxable.
Similar but different
What is videoconferencing classified as for tax purposes? Is it a telecom service, or software as a service (SaaS)? And are they taxed differently?
In most states, sales tax applies to telecom services. In addition, local jurisdictions have numerous compliance obligations associated with providing telecom services. In short, these are rich revenue sources for tax jurisdictions.
(To learn more about the complexities of telecom and VoIP taxes download our eBook – 10 Steps to Understanding Telecom & VoIP Tax Compliance.)
SaaS is currently the predominant delivery method for tech/software companies and is taxable for sales tax purposes in roughly half the states (and counting).
Which of the above matches videoconferencing services in terms of tax obligations? Neither, exactly. Which is closest? Again, hard to tell.
Has a trend begun?
In recent years (even before the pandemic), video conferencing was taxable in various states, sometimes depending on where the videoconferencing equipment was located, sometimes as an ancillary service or even as a telecommunications service.
Zoom Video Communications Inc. announced last year that it would start collecting local utility and communications taxes in California, New York, Maryland, and Virginia. The specific taxes and their rates vary depending on the state and locality in which the user is located. News outlets said California customers were notified that they could be subject to taxes as high as 11%; in all five boroughs, Zoom was reportedly set to collect a 2.35% New York City Utility Tax on communications services to both business and residential customers. (“Something new is coming to some Zoom Video Communications customer invoices,” one report read. “Local taxes.”
As many businesses decide to continue their work from home policies, will more states jump on this? The likely answer is yes. Expanding the tax base to include additional services is a “hidden” way of increasing tax revenues without the noticeable increase of sales tax rates – which is often frowned upon by the public.
As for many things with sales tax, there is no clear answer. And as the use of video conferencing continues to grow and expand, we are sure there will be more discussion of this in the future.
If you’re looking for help in navigating sales tax and understanding where you have an obligation, contact TaxConnex. We act as your outsourced sales tax department, completely removing the burden of sales tax from you and your business.