Maybe it's time to change this season's refrain to, "Have yourself a very connected Christmas." From the Amazon Echo to the GoPro Hero+ to the Nest Cam, it seems that all the hottest items on everyone's holiday wish list are web-connected.
Cars, cameras, even pressure cookers come straight off the line with internet connectivity built directly in, and it's a trend that's only set to grow. Estimates say that by 2019, the Internet of Things will be the largest device market in world, more than double the size of the smartphone, PC, tablet, connected care, and wearable market combined.
But this connectivity revolution has spawned a vexing set of challenges for tax professionals. Many companies who are selling these devices are blissfully unaware that by doing so, they could be changing the way their company is taxed. Internet connectivity can trigger dreaded telecom tax rates for entirely new classes of products that never had them before, giving a whole new meaning to the Nightmare Before Christmas to product manufacturers of every stripe.
I recently spoke to Jim Nason, a U.S. tax telecommunications sector leader at Deloitte Tax, LLP, who recently wrote a perspective piece about what businesses need to consider as the line blurs between products and services. He told me that it's becoming incredibly commonplace for corporations to be caught off-guard by this issue.
"The tech revolution has created so many new opportunities, but tax personnel can be caught flat-footed if they don't keep up with how their business is evolving," Nason said. "Traditional tax people tend to focus on the fires that are in front of us, like immediate tax issues, new products that are offered, court cases, tax laws changed. Then they wake up one day and they realize that their product has changed so much that they no longer have the expertise or even the right people on staff to deal with it."
The issues at hand are multifold, but the most glaring come from corporates not being aware that they're triggering telecom taxes, which are traditionally some of the largest and most complex in the country. For example, many cars now come enabled with cellular connectivity that allows drivers to access Wi-Fi in the vehicle and allows the cars themselves to communicate with the dealership and the manufacturer. That feature alone can have impact on an entire an auto manufacturer's fleet in terms of how they are treated for taxes.
"The ability of a device to communicate added a whole new telecommunications dimension," Nason explained. "Somebody needs to pay tax on the car's use of the cell phone, and because it's mobile, it's difficult to figure out which states have the right to jurisdiction."
"When a product mix moves from charging for a product to charging for a service, that complicates the tax side of the equation enormously," he continued. "If that service is communications-related, you're stepping into the Twilight Zone, because telecom taxes are much more complicated. It's a notoriously difficult area of tax."
Nason says that putting together the solution for today's hyper-connected economy is a huge job already without these added complexities. Looking down the pike to anticipate products companies don't even offer yet can cloud things up even more.
So how can companies avoid a potential tax mess? Nason says the key is to loop the tax team in early in product development.
"There is an opportunity for the tax department to have a seat at the table, and figure out what their exposure could be and play a role in education to the business," Nason said. "Being aware is step one, and tax pros need to be aware of changes in the business as much as the marketers, advertisers, and new product developers."