The Internet of Things has effectively taken over tech, and it’s still growing. There may be as many as 25 billion connected IoT devices by 2021, almost double what it was just three years prior. This growth is staggering, but there are still a few roadblocks in the way of a true IoT revolution.
Tech manufacturers have made tremendous strides in improving IoT. Connected devices today are smaller, more functional and safer than their earlier versions, but some problems still plague IoT developers. Many companies may find it challenging to navigate the minefield of IoT taxes.
Services vs. Products
To understand the challenge of IoT taxation, you have to know the difference between the taxes on products and services. When you buy something, you either pay a sales tax upfront or a use tax later on. Businesses collect and record these taxes to pay back to the state.
You typically collect taxes at the time you provide something. When it’s not clear what exactly the service is or when you offered it, how can you determine when and how much to tax? This issue is becoming increasingly common as internet-based services grow.
Do IoT devices fall under products or services? This question is what can get IoT companies into some trouble. They have to determine what their technologies are, and if they’re services, they may fall under the muddy waters of communications tax.
Communications Taxes
Communications taxes apply to more than just phone services. For example, software subscriptions are subject to communications tax in Florida. Because IoT devices transmit and receive data, they can often count as a communications service.
Why are communications taxes such a big deal? To start, they can be far more expensive than other services or product taxes. Higher taxes mean companies have to charge more for their devices, which can drive away customers.
They’re also notoriously complicated. There are more than 300 different communication tax types, with almost 700 different tax bases. Sorting through all these to file the appropriate amount can be time-consuming and expensive, hurting small innovative companies.
Smaller tech startups may not have the resources to make sense of communications taxes. However, if they don’t know what they’re doing, they can make filing errors, which can lead to legal trouble. These difficulties can prevent companies from pursuing IoT, which can keep consumers from valuable goods and services.
What’s Next for IoT Companies?
You’ve probably heard it said that nothing is certain but death and taxes. The tangled territory of communications tax probably won’t be going away anytime soon, so IoT companies have to adapt to it. More of these businesses will likely start paying greater attention to their tax departments.
If companies hire experts in communications tax, they’ll be better prepared to take on the nuances of their liability. These businesses will need to have robust and knowledgable tax departments to survive. As the technological landscape changes, this will become even more essential.
You’ve heard of the potential of upcoming 5G networks, but you may not realize that this will affect the tax horizon. IoT functions will develop faster than legislation will be able to keep up, meaning businesses must prepare for late changes in tax regulations. They must be future-proof for legislative developments, not just technological ones. These complex tax situations may have an upside. IoT companies may look for innovative ways to create affordable devices to make up for higher taxes. Tax may be unavoidable, but you can be sure that the IoT isn’t going anywhere, either.
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Last Updated on February 3, 2021.
