TAXES

An Arcane Tax That's Probably Costing Your Company Too Much

There's one hidden cost that often goes unaccounted for when filing with Uncle Sam.
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In the throes of tax season, here's yet another line item businesses must consider: hidden wireless costs.

What seems like a simple consideration is actually quite complex. Wireless taxes in Washington State, for example, run the highest in the country at 24.2 percent. Just next door in Oregon, wireless services are taxed at a 7.3 percent rate--the nation's lowest.

Why such drastic variation? Around 10,000 tax jurisdictions--at federal, state, and local levels--impose wireless taxes and surcharges that are tacked on to monthly phone bills. The average tax rate across the country is 17.2 percent for wireless services, according to MyWireless.org.

For companies footing employees' wireless bills, the tax equation is especially cumbersome--imagine budgeting for drastically different tax rates for workers scattered across the country. With so many factors contributing to confusion, there's little relief in sight.

A Headache for Business

Most companies have a ballpark idea of what they're paying in wireless taxes, but they feel like there's nothing they can do about it, says Jim Breitzman, president of ECB Wireless, a Wisconsin-based company that helps organizations optimize taxes based on pooling and the geography of employees.

Companies should also know that if they go over their text plan by $150, they're being taxed on those overage charges. So not only are they wasting money, they're getting taxed on that wasted money.

The "Balance Due" portion of the bill isn't the only challenge in managing wireless fees. After all, businesses ultimately can deduct the cost of many wireless surcharges and taxes. But there's a huge hidden cost in tracking the taxes owed under different contracts--and staying on top of employee contracts that need to be amended.

Federal, state, and local governments have also gotten very crafty about using wireless contracts as a source of new revenue. In New York, for example, a customer's wireless bill includes up to 11 different fees for line items like 911 services and local school districts. Carriers collect the fees, not Uncle Sam, which makes the process politically palatable.

Is Your Company Breaking the Law?

The Federal Mobile Telecommunications Sourcing Act requires a wireless customer to pay taxes based on the "place of primary use," or PPU. If an employee signs up for service in New York City but later relocates to San Francisco, she's required to pay taxes and fees based on where she resides. Ditto for an employee who lives in, say, Sacramento, California, but works mostly in Oakland.

Most companies don't pay attention to--or even know about--these rules, Breitzman says. When an employee transfers offices, the company should reassign the PPU, but that rarely happens. Those businesses could be subject to back taxes, penalties, and false information lawsuits from the government.

Breitzman says the first step in addressing taxes and noncompliance issues is awareness. Companies need a better understanding of their wireless tax rates and mobility options.

Adapt Now for Future Change

Cell-phone taxes are trending upward, according to a report by economist Scott Mackey. From 2010 to 2012, overall tax burdens on wireless consumers grew about four times faster than general sales taxes on other goods and services. As these costs pile up, companies need to be familiar with what they should be doing now in order to be ready for further increases or policy changes in the future. Check out what your state collects in wireless taxes and fees to get started on the path to understanding the bottom line.

States with the most expensive wireless tax rate

Rank State Combined federal, state, and local rate
1 Washington 24.20%
2 Nebraska 24.08%
3 New York 23.34%
4 Florida 22.16%
5 Illinois 21.42%

States with lowest wireless tax rate

Rank State Combined federal, state, and local rate
1 Oregon 7.39%
2 Nevada 7.65%
3 Idaho 8.23%
4 Montana 11.61%
5 West Virginia 11.76%

[Source: MyWireless.org]

Last updated: Mar 10, 2014

BZUR HAUN | Columnist | CEO, Visage

As CEO of Visage, Bzur leads all facets of the business, including the strategy and operations of Visage.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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