How High-Growth MSPs Can Avoid the Hazards of Communications Tax

How High-Growth MSPs Can Avoid the Hazards of Communications Tax

By Special Guest
Evan Rice, EVP of Sales and Marketing at

As more Managed Service Providers (MSPs) who traditionally focused on IT support now begin to offer network and communications services, they are discovering enormous growth and profit potential. The demand resulting from increasingly remote workforces, distributed service and support functions, and other network-intensive business operations looks like low-hanging fruit for the MSPs who already have an established relationship with their prospective customers.

The attraction is obvious: Cloud-based communications services are easy to sell, provision, and ultimately increase the share of recurring MSP revenue. Creating a better economic profile with recurring revenue is appealing to IT MSPs who have historically drawn much of their revenue from reselling products. What’s more, the recurring, subscription-based model typical for these services yields higher-long term margins through retention than legacy IT “break fix” services.

But tax remains a familiar bitter seed at the center of that low-hanging fruit, and not just the garden-variety sales taxes that MSPs might be familiar with. Communications services come with a whole collection of distinct, complex and frequently changing taxes that can chip away at provider margins if not handled properly.

So, let’s look at what it takes for MSPs to navigate this unique tax landscape.

New Services Create Unique Tax Implications
One of the advantages of offering telecom and data services, cloud-based or otherwise, is the sheer number of services you can offer. Even better, many of those services can be turned on with the virtual flip of a switch.

However, each of these offerings come with its own set of complexities for billing. They might have a base or time/usage-based rate. Those rates might be tiered along with charges for overages. Some might be considered the equivalent of “on-premise” while others involve transit across multiple jurisdictions. The complexity can be mind-boggling.

Now take that complexity and multiply it by the applicable tax rate. Different services can have different tax rates, and even the same service can have different rates and rules across jurisdictions – and these are constantly changing.

Where You Go Determines What You Pay
"Like sales tax, governments tax telecom and data services by jurisdiction all the way to the local level," said Steve Lacoff, General Manager of Communications at Avalara, a leading provider of tax compliance automation software for businesses of all sizes, and a partner. "Depending on the services and how they’re sold, delivered and used, your business may involve multiple taxing jurisdictions with highly varied rates and rules.”

As the service provider, from your customers’ and government’s point of view, the MSP is responsible for collecting and remitting these taxes. You will need to be able to accurately track and apply the proper tax rates and rules to do this, as well as to generate a detailed bill to pass those costs on to the customer and recover funds. This has implications not only for the tax that needs to be calculated for an MSPs invoices and sales, but also the downstream returns that need to be filed."

Simplifying Communications Taxes
The good news is that modern tax automation solutions can help you address this regulatory nightmare, keep track of the ever-changing tax landscape, and make that data available for telecom subscription billing services. Avalara is a leading compliance automation provider, and is a model for managing telecom billing.

The two systems are tightly integrated. Once a customer is in the system using the MSP’s product catalog, the billing is completely automated. Better still, the applicable taxes are assessed automatically. This includes fees for key services like 911 access charges that may be the same for everyone.

The system itemizes those charges on the customer’s bill and provides the data back to the MSP’s accounting platform. This helps MSPs prepare and submit communications tax filings, which can involve a wide array of forms and filing deadlines.

Partners in Profitability
For MSPs to move from being pure resellers to complete communications service providers—expanding their territories in the process—they need to undergo a digital transformation of their operations. This is especially true for their billing systems. Telecom subscription billing is a quantum leap beyond charging a monthly retainer.

Add in the complexities of the taxes outlined above, and there are increased risks of costly billing errors. With manual compliance no longer an option, MSPs entering this new area are utilizing a cloud-based, telecom-specific subscription billing platform with a fully integrated tax automation solution. Such a platform allows the MSPs’ billing operations to stay current with minimal involvement.

With such a platform, MSPs have more than billing software. They have partners who are constantly working to handle the complexity of making money in this market. With the right partners, MSPs can actually see the profits and growth that attracted them to this market in the first place... without falling into the many traps seemingly around each corner.

Edited by Maurice Nagle
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