5G and Iot: The Next Wave Of Communications Tax Complexity
By Tony Susak
In the first article of this series we introduced the hot topics of 5G and IoT, or the “internet of things.” We are becoming increasingly surrounded by IoT devices in both our business and personal lives, and this will only continue to grow as 5G technology improves and becomes more pervasive.
But did you know that there are several red flags that indicate a 5G-powered IoT device or service may have a more complex and costly communications tax responsibility, rather than a simple sales tax requirement? This final article in our series will help you know what to look for, and steps you should take to prepare.
First, it’s important to understand exactly what 5G really is. While it may feel like magic with all the hype (and it will be impressive), 5G is basically the next level of wireless connectivity following 3G and 4G. 5G will deliver faster speeds, lower latency and greater reliability than the 4G technology that powers most mobile phones today. The benefits of this heightened connectivity will enable new and exciting applications across every industry, from health care to agriculture to transportation. It is considered a game-changer due to the truly revolutionary types of applications that it can enable.
Powered by 5G, the IoT market is predicted to explode over the next decade. With consumer, business
and government applications, sensors can be attached to just about any “thing”— cars, refrigerators, virtual reality games, thermostats, soil monitors, tractors, shipping pallets, streetlights, cows, defense equipment — and they will transmit huge amounts of data to power these exciting new services and business insights. The National Science Foundation estimates that by 2020, IoT will connect 50 billion smart things via 1 trillion sensors, and according to a survey conducted by Ericsson, 70 percent of companies will have some form of IoT application in production by 2021.
These devices and their applications all rely on one thing — connectivity to the 5G network. What is critical to understand is that this connectivity may be communications taxable. If your company or a company you are advising is entering the IoT device or application space, it’s imperative to consider the communications tax implications. Failing to do so could lead to major fines and penalties with material implications. However, by approaching these services proactively, you can confidently roll them out while minimizing the risk of a surprise.
IoT tax complexity
Greatly simplified, understanding the complexity of communications tax for IoT devices and services comes down to three main questions regarding connectivity. There are many nuances to each of these, but at the core you can look to these for guidance:
1. How is the connectivity provided? Understand whether the connectivity service is provided via Wi-Fi, is connecting to an existing home or business internet connection, or is embedded on the actual device. The only one that is communications taxable: embedded on the existing device.
2. How is the application service provided? If the primary service is provided directly via the device, then it’s likely communications taxable. However, if it’s provided “over-the-top” of an existing service, it may not be communications taxable.
3. Who provides the service? This is the most complicated question. There must be a transaction, or a point of consideration, for taxability. Who in the supply chain is supplying the taxable service? And is it to a taxable entity? How is it bundled? There are many more layers of complexity.
These questions are difficult to untangle, even for those well-versed in communications tax. If you or your client are embarking on an IoT product or service journey, it is best to consult with an expert to be absolutely certain what communications tax responsibilities might be on the horizon. It’s far easier, and often less costly, to plan ahead than to fix mistakes.
Meet the tax challenge head on
When your company or one you are working with is developing 5G-powered IoT services, there are steps you can take to help ensure you fully understand the tax responsibilities. This will help roll out the services with minimized risk of a huge tax surprise down the road.
- Start by getting people in place. Accounting departments at most small and medium-sized businesses don’t have the staff or expertise necessary to handle communications tax compliance, both for calculation and filing. Either hire that capability or find a trusted advisor or vendor with niche experience to help you.
- Build the right technical structure. The technical requirements to calculate, track and bill communications tax are very different than sales and use tax. Depending on the number of jurisdictions you are in, this can quickly become unmanageable without appropriate tax and billing platform automation.
- Brush up on the technology. It never hurts to make sure you truly understand the technology — 5G, IoT, and how your products and services fit into the big picture. The better you know how it all works, the easier it will be for you to understand the tax responsibility.
Communications tax — where do you go from here?
This series has provided a practical introduction to the complex issues related to communications tax responsibility. While consulting with an expert is always the first and best recommendation, hopefully you’ve learned some tips to help ensure ongoing compliance.
Source: Accounting Today, November 27, 2019 (https://www.accountingtoday.com/opinion/5g-and-iot-the-next-wave-of-communications-tax-complexity)