Communication Service Providers: Are you losing money to FCC safe harbor ratios?
Anyone who works in the realm of 3Gs, 4Gs and Internet protocols knows this: Rapid adoption of new technologies has forever changed how we communicate. Cellular networks, cable, satellite, VoIP and a multitude of emerging innovations have expanded the scope of the communications industry to include so much more than traditional telephone calls. Today, when customers want to initiate voice calls, they can opt for flat-rate monthly plans to do so while crossing state lines or use VoIP to speak with people on the other side of the world without incurring long-distance fees.
The lightning-fast pace of advancements has governing bodies in a bind: How do states and the federal government effectively regulate an industry that’s in a continuous state of change? Which taxes and fees should be applied, and when? As technology evolves faster than the law, the answers to these questions and others like them change frequently. As a result, communications service providers (CSPs) face some of the most complex calculations in the entire tax industry. Different areas of communications are all taxed in very different and exceptionally complex ways.
In an effort to help simplify one of the more complicated aspects of communications taxes for cellular and VoIP profiders, the Federal Communications Commission offers safe harbor ratios to gauge tax payments on interstate and international voice calls.
On the surface, it seems like a straightforward solution. But this safe harbor option brings about yet another challenge for CSPs: determining if, and when, using the FCC’s predetermined ratios will benefit your business.
Communications Tax Filing Options
To remain tax compliant, CSPs need to report on the portion of their revenue that comes from interstate and international calls. This is still true today, even though traditional long distance phone calls have been largely replaced by nomadic cell phones, VoIP and bundled services that often complicate the process of tracking which calls are made from and to where. The ease with which customers can make voice calls while crossing state lines or sitting in front of computers has turned a once simple system into an incredibly complex measurement for calculating and filing communications taxes.
The FCC recognizes these difficulties and offers three options for wireless and VoIP providers which, by extension, are also available to states:
# 1 Call Detail Records
A CDR contains all the details of a voice call between two parties: where it originated, how long it lasted, total allowance usage and more. The comprehensive nature of these traditional records can help lessen financial impacts of communications taxes. However, they often present compliance challenges for CSPs that don’t use unbundled, transaction-based billing.
# 2 Traffic Studies
In-depth traffic analysis can help CSPs gain an understanding of how voice calls are distributed. Put simply, these studies enable providers to accurately determine which portion of calls fall into the realm of interstate communications. When filed quarterly with the FCC and the Universal Service Administrative Company, they can be used as the basis for calculating taxes and fees.
# 3 Safe Harbor Ratios
With safe harbor, the FCC defines the portion of services it’s willing to assume are interstate and international versus intrastate and local. Wireless telecommunications and VoIP providers that choose to apply these ratios can assume that the FCC will not find it necessary to review or question the data underlying their reported percentages.1
Wireless & VoIP Safe Harbor Ratios Over the Years2
While the FCC’s safe harbor percentages have remained stable for a decade, the wireless ratio more than doubled since its 1998 introduction and VoIP has remained at the high end of the spectrum.
- 1998: 15%
- 2002: 28.5%
- 2006 – 2016: 37.1%
- 2006 – 2016: 64.9%
Is Safe Harbor Right for You?
This is a question CSPs should revisit on a regular basis. Although FCC safe harbor ratios are designed to simplify tax calculation and remittance, they may not always work to your benefit.
Here are three key considerations to factor in when making a determination:
Consideration #1: How do current safe harbor percentages compare to your own?
At a minimum, every provider should conduct an informal traffic assessment to gain a general understanding of how much revenue is generated by interstate and international calls. If your own ratios appear to be significantly lower than the FCC’s, it’s an indication you could possibly be losing profits if utilizing safe harbor.
Consideration #2: How much would traffic studies cost your company?
If the safe harbor ratio appears to be notably higher than your actual interstate percentages, you may want to consider investing in an in-depth analysis to reduce your collection and contribution amounts. Before conducting your first traffic study, consider the price of the study itself as well as additional operational costs, attorney fees and related expenses to be sure they don’t cumulatively exceed your projected safe harbor payout.
Consideration #3: How are things changing?
CSPs are not required to use the same approach for all services. If VoIP patterns are changing at a different pace than wireless, you can accept the safe harbor ratio for one and not the other. And because the FCC requires wireless and VoIP providers to make an election each quarter, you can switch from reporting actual revenues to using the current safe harbor — or vice versa — as customer communication behaviors evolve and change.
Consideration #4: What are the potential financial implications of traffic or CDR reporting?
Keep in mind that if and when your organization reduces interstate reporting with traffic studies or call detail records, intrastate reporting (and corresponding USF charges) will inherently increase and may negate some of the initial gains. Because state USF rates tend to be significantly lower for intrastate reporting, the benefits of CDRs and traffic studies might still outweigh any disadvantages - but it’s an important consideration that many companies mistakenly overlook.
Tax Automation Solutions
Safe harbor ratios for VoIP and wireless represent just one of many confusing (and constantly changing) options that communications service providers must investigate and interpret. The research involved is time-consuming and error-prone, and often puts providers at risk of severe penalties in the face of increased regulatory scrutiny — not to mention the potential for forfeiting profits by overpaying taxes that didn’t actually need to be remitted. It’s a big challenge, to say the least.
Tax automation can help. Studies have shown that organizations using automated tax solutions are more than twice as likely to have streamlined calculations and nearly three times as likely to have the accuracy of those calculations systematically verified.3 Put simply, while the tax environment impacting today’s communications service providers is both complex and confusing, tax automation offers a way to overcome many of the biggest challenges and keep your business from overpaying taxes or bearing the brunt of a costly audit. Solutions designed specifically to support the unique requirements faced by CSPs can make it much easier to apply and adjust safe harbor ratios, traffic study percentages and CDR rates.
In Conclusion: Be Prepared
As the communications industry evolves — and as state and federal regulatory bodies scramble to keep pace — providers must keep a close eye on changing rules, rates and regulations. Staying up-to-date on how the FCC’s wireless and VoIP safe harbor ratios compare to your own is one way to help ensure your organization remains both compliant and profitable. A tax automation solution designed specifically for CSPs can dramatically simplify and streamline this process. Don’t hide your head in the sand. What you don’t know CAN hurt you.
Be prepared. Start Today.
At Avalara, a team of communications tax experts keeps a close eye on safe harbor ratios and countless other issues impacting calculation, compliance, and remittance. These same experts maintain a free calculator that can be used to quickly determine communications taxes for even the most complex transactions. By simply entering a few key details, you can view federal, state, county and city taxes within seconds.
How can communications tax automation help you? Try our free calculator to find out: communications.avalara.com/communications-tax-calculations
1 Federal Communications Commission: How to File the FCC Form 499-A
2 Federal Communications Commission: Wireless & VoIP Safe Harbor Ratios Over the Years
3 Aberdeen Group: Addressing the Indirect Tax Challenges Facing Communications Providers
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