For Communication Service Providers, taxation is an important element of their monetization strategy and cannot be overlooked. The famous words from Benjamin Franklin spring to mind: “In this world nothing can be said to be certain, except death and taxes.” Taxation can get complex and having the right systems in place to automate that complexity are paramount.
As a central player in catalog management and billing transactions, the billing platform becomes a key actor in the configuration of catalog and account level taxation rules. This makes it even more important that companies integrate with a Billing system that has the flexibility to handle their tax needs no matter how complex.
It is quite common for communications services to emerge and penetrate the market prior to the evolution of the tax code. This is something we have observed in the Unified Communications space and we are seeing similar trends in IOT. This often means that service providers are providing catalog offerings without a complete understanding of the underling tax consequences in regards to billing and taxing. It is not surprising then that tax considerations are often overlooked when selecting a billing system.
While EngageIP offers an internal tax engine for basic taxing, LogiSense has also partnered and integrated with several 3rd party tax engines such as Avalara and SureTax for more advanced taxing scenarios. This enables LogiSense to leverage the expertise of our partners for taxing purposes and bring a consolidated solution to our customers.
This blog outlines some of the considerations that service providers need to be mindful of when creating product offerings and selecting the underlying billing systems to monetize them.
Transactions, Taxes and Adjustments
Each transaction in a system has tax implications. These tax implications vary based on the nature of the transaction. The tax rates are determined from the applicable tax code for that account or the jurisdiction of the Billing or Service entity. Furthermore, in a parent child account hierarchy, the children might inherit the corresponding tax codes from the parent. These are all items that need to be configured within a billing system when setting up the account hierarchies and catalog offerings.
Subscription taxing is a bit easier than usage taxing as we can often know the charges ahead of time and can batch them during billing – with usage we often have to apply taxes in real time as the feeds come in. Doing this in a performant manner is critical. Taxing errors will almost automatically occur in a billing scenario; most often these occur due to misconfigurations. Tax adjustments allow you to correct taxes on an account where an incorrect amount was applied or where there was a configuration error that has occurred.
Tax Inclusions, Exclusions and Exemptions
It is quite common for businesses to offer tax inclusive pricing on their services. This simplifies things for the end consumer; all they would see it the total amount they are going to pay. The onus is on the billing and back office systems to deal with the underlying complexity of splitting the pretax cost from the taxes and remitting the appropriate taxes. The business may also want to exclude certain countries and states from taxes or exempt certain accounts from paying taxes.
Exclusion and exemption rules can get complex – only select accounts may be exempt for select tax codes in select jurisdictions. Many systems can handle these in isolation – the challenge lie in handling the various permutations of inclusion, exclusion and exemption rules that can occur simultaneously. Smaller businesses may not have to deal with these complexities at the start, but as the business grows and starts to move into multiple jurisdictions, these considerations start to get more prevalent.
Tax on Tax
Tax on tax scenarios are quite common in many countries due to combinations of state and country level taxing. For example, in Canada, some provinces apply a unified Harmonized Sales Tax, while in others a combination of Provincial and Federal sales taxes (PST and GST). In Canadian provinces that charge GST and PST, the tax rates for GST and PST are calculated based on the original cost of the goods or service; for a $100-dollar service in Quebec the 5% GST and 9.975 % PST are calculated on the original $100-dollar amount giving us an effective tax rate of 14.975.
However, in some countries, the second tax is calculated based on the accumulated charge of the original service and the first tax. This can be further complicated by account and catalog level tax inclusion and exclusion settings.
Billing as a Service and Hierarchical Taxing
Billing as a Service models are gaining prominence in the Unified Communications space as more and more service providers are looking at offering turn key solutions for their resellers to white label. As part of that engagement, the reseller would typically be set up as a tenant on a billing system. In turn each reseller can white label services for their own reseller.
This can result in complex hierarchies with multiple tenants and nested parent child account hierarchies. In such scenarios taxing can get complicated. For example, the entity being invoiced might reside in a different tax jurisdiction than the entity that consumes the service. Furthermore, separate entities may be invoiced for subscription and usage charges. A Billing system needs to offer the requisite granularity to handle invoice related tax configurations in multi tenant scenarios.
Reporting and Reconciliation
From a reporting perspective a popular report that is of interest to Finance teams is the Taxes Payable Report which reconciles all taxes applied to charges along with information on the applicable account, tenant, Owner, Date, Tax Rate, Tax Codes and Tax Categories. It is instructive to understand how each charge is spread out on a Tax Rate basis. From a compliance perspective, it is important to remit the amount of tax due to the appropriate tax authorities.
Sometimes specific formats for taxes are required when submitting taxes payable to government departments or other organizations. Once taxes are applied, tax details need to be logged to provide granular detail on the taxes charged for reconciliation and tracking purposes.
We hope this article has provided some perspectives on the various considerations you need to keep in mind from a billing and taxation perspective. If this is something that resonates with you, we are happy to help.