Today’s new normal is changing what we once thought of as the traditional business model across many industries; communications, media, and technology are no exception. A recent study of senior leaders in these sectors revealed that nearly three-quarters (73%) plan to merge or partner with other providers in order to offer broader services to customers within the next two years.
At the forefront of this heightened interest is growing customer demand for new services - like video and digital content - which continues to accelerate as much of America is now working (and streaming) from home. While this trend is not new, the surge is, and it shows no signs of slowing down.
Still, with more industry convergence comes more complexity and uncertainty, especially as it relates to communications taxes. As the market continues to settle into its new reality and embrace different partnerships, effectively planning for tax challenges is one of the differentiators that will set best-in-class performers apart from the rest. Let’s take a deeper look at the industry’s current drivers of change, complexities in communications tax, and how today’s businesses can prepare.
Video, 5G, and IoT drive business change
At the core of why communications companies are choosing to bundle an increasingly diverse set of services more than ever before is a desire to stay competitive. In the previously referenced survey, nearly a third (29%) of businesses plan to merge or partner so that they can launch new bundled services, with 38% of leaders admitting that competition is what’s fueling these changes.
Increased customer demand for new services like video and 5G/Internet of Things (IoT), coupled with a decrease in traditional voice services, is paving the way for this business dynamic. More than 70% of respondents identified both factors - demand for digital/video content and 5G/IoT - as drivers of change to stay in line with the competition. With more than a fifth of U.S. households expected to be cord-cutters by the end of next year, growth of these emerging technologies goes hand in hand.
Streaming-specific taxes are becoming more pervasive, in lockstep with the massive shift in consumer preference toward this mode of consuming media. This growth has escalated with the impacts of COVID-19 restrictions and the surge is not expected to diminish.
Streaming communications taxes are currently in place in several state and local jurisdictions. Maine, Utah, Illinois, Kansas, and Massachusetts have similar tax legislation pending.
As state budget shortages continue to escalate, states must address declining revenue from higher-taxed traditional communications services as consumers continue to cut the cord. At any time there are potentially thousands of tax jurisdictions monitoring the rapidly evolving streaming industry as a potential source to make up for this deficit.
Complexities in communications tax
While keeping up with the competition remains a priority, what businesses don’t always realize is that offering these diverse bundled service types makes them more susceptible to communications tax liability issues. In fact, over half (58%) of surveyed leaders admit they’ve previously failed a tax audit, while 19% of respondents specifically say this is due to not realizing products were subject to communications tax.
With increasing mergers and partnerships, communications providers should be aware of the unique complexities that come with this new territory. For example, when services are bundled, calculations become incredibly complex, which can result in costly and time-consuming errors without the right tools. Also, when a nontaxable service is bundled with a taxable service, the entire bundle could be subject to communications taxes and regulatory fees. These nuances, along with technology changes typically outpacing tax law regulation, means companies need to be ready to act quickly and remain aware of the everchanging tax landscape.
Setting communications businesses up for success
Despite the complexities, there are steps communications, media, and technology companies can take to avoid negative tax implications. The survey mentioned earlier revealed that those businesses which are best-in-class performers feel more prepared with communications tax compliance, even as their product mix changes and partnerships emerge.
It’s important for companies to understand tax implications across their entire product suite, knowing which offerings are taxed individually as a communications service and how this changes if bundled. This also requires staying on top of market and regulatory changes in order to remain compliant. In addition, businesses can look to their own teams and technology to ensure they have the right expertise and solutions in place to navigate communications tax compliance and regulatory reporting.
The communications industry is changing fast, with new partnerships paving the way for increased innovation in emerging technologies like video, 5G, and IoT. Fears of growing complexity relating to taxes shouldn’t slow this innovation down. With the right knowledge of what these complexities are and how businesses can mitigate their tax risk, companies can prepare for the right challenges and build sustainable organizations for the long term.
