IoT News – Coverage and confusion: 5G and IoT create new tax implications in 2021
By Toby Bargar, Senior Tax Advisor at Avalara.
IoT and 5G are exploding, with use cases ranging from consumer goods to connected health to manufacturing. While the benefits are widely understood, there is a continuing lack of clarity on what is and is not taxable communications. Should IoT connectivity really be classified as the Internet or is it a LAN / WAN data network? Due to the unstoppable growth of these technologies, this is fertile ground for tax authorities, and businesses are increasingly concerned about the darkness surrounding risk.
Alexa, where is the money
Taxable income from communications is declining and thanks to the permanent law on fiscal freedom on the Internet (PITFA), national and local taxation of the ISP service is prohibited. Federal, state and local jurisdictions need to find ways to fund their initiatives and taxing IoT is a tempting way to do it.
This is by no means final, because the taxation of IoT is not black and white. Changes in laws and regulations to facilitate this will not happen overnight. In the meantime, however, we have yet to navigate a complex web of laws, regulations, and tax liabilities associated with IoT.
World wide web of questions
When looking to understand your IoT tax risk, it’s helpful to start with two simple questions:
1) Do I really sell Internet access? It is important to understand the difference between private network connectivity and what is considered Internet access. Basically, Internet access is tax free in the United States. However, there are potentially restrictive definitions of what qualifies as an Internet service and who can be an Internet Service Provider (ISP). If you provide a service to subscribers that meets the statutory definitions of ISP service, federal law provides for a moratorium on state and local taxes.
But private network connections have a different set of rules. If you connect the IOT device through a local area network or a wide area network (LAN / WAN), most states will treat it as a chargeable communication service. In addition, you may also be subject to Federal Universal Service Charges (FUSF). And even here, questions remain. If you sell a device that offers connectivity but does not enable a WWW experience, it may not meet federal definitions for ISP service. If a sensor or other device transmits data using Internet protocols but does not allow access to the web, it is reasonable to question whether this connection qualifies as the Internet or whether it is an Internet connection. ‘a WAN / LAN network.
2) How do you provide connectivity? Is your connectivity built in or overdone? If you offer a device with its own data connection as part of the sale or service plan, such as a drone with its own wireless SIM card for navigation and transmission, the connection is built in. There are varying structures between device vendors and network operators, but vendors may need to account for any taxes that need to be collected with respect to their device connections.
Over-the-top connectivity is networked through a user-supplied connection. This connectivity can be wired, Wi-Fi, or even purchased separately from a wireless service. Good examples are consumer devices such as printers, smart doorbells, or exercise machines. The taxes on these connections are between the user and his ISP. The IoT device maker is probably not responsible for their customers’ internet connections.
Saddle for uncertainty
In 2021, as we predict that IoT taxation will remain the Wild West, it is in your interest to increase your tax risk awareness. Monitor tax rules at the federal and state levels. Be vigilant about watching for upcoming Internet tax changes to prepare.
It also helps to have a business conversation about IoT risk tolerance and taxation. This approach can help you avoid getting caught off guard and taking a big hit on your bottom line. Most importantly, consult with tax and legal service providers who can help you navigate the changing landscape.
The Wild West of the IoT classification may not be settled in the short term, but with the right advice and the right strategy, you can survive.