MYTHS & MISPERCEPTIONS: Regulatory and Tax Responsibilities for Retailers/ Suppliers of Telecommunications Services

There is a common misperception that resellers of telecommunications services do not need to pay taxes and regulatory fees (e.g., USF fees) to government agencies as long they pay taxes and fees billed by their suppliers (i.e., wholesalers). Many resellers mistakenly believe that a supplier can pay taxes and fees “on behalf of” the reseller. Unfortunately, a reseller cannot “contract away” its own tax/regulatory fee responsibilities.  A supplier cannot pay “on behalf of” a reseller customer. 

More than likely, this myth derives from a misperception regarding the general prohibition on “double taxation” and a fundamental misunderstanding of the supply-chain tax and regulatory fee exemption system in the United States. 

In reality, retailers generally bear the burdens of billing, collecting, and remitting taxes and regulatory fees on sales of telecommunications to their end-user customers regardless of whether:  

(A) the retailer has already paid taxes and fees billed by its  suppliers (i.e., pass through charges); and/or 

(B) the retailer’s suppliers have already paid taxes and regulatory fees on the same services. 

This Educational Advisory aims to dispel the Myth and Misperception that telecommunications resellers (including VoIP) do not have any registration or remittance obligations for taxes and regulatory fees if/when either:  

(A) the reseller paid taxes and fees to its suppliers; and/or  

(B) the reseller’s suppliers are registered and are remitting taxes and regulatory fees on the same services – based on sales to resellers. 

Regulatory Fees 

Supply chain/regulatory fee exemption issues are perhaps most apparent for the Universal Service Fund (“USF”). Generally, revenues from end-user interstate telecommunications services are subject to USF contribution obligations – including resold services.1 In order to prevent duplicative USF contributions, the Federal Communications Commission implemented the so-called “Carrier’s Carrier Rule” (“CCR”)2, which exempts wholesalers from contributing to the USF on the basis of wholesale sales if they have a reasonable expectation that their reseller customers are contributing to the USF based on services purchased from that wholesaler. However, if the wholesaler does not have a reasonable expectation that the reseller is contributing to the USF, and the reseller fails to pay, then the wholesaler is liable for the fee.  

In reality, compliance with the CCR involves complex and potentially costly verification procedures for service providers. Moreover, failure to follow such verification procedures may lead to USF contribution obligations for both the retailer and supplier: 

• Wholesalers – If a wholesaler (i.e., supplier) fails to demonstrate that it has a “reasonable expectation” that its reseller customer is contributing to the  USF, the wholesaler must report revenues from the reseller customer as retail end-user revenues and must pay USF fees on these revenues. Alternatively, revenues from sales to reseller customers are exempt from USF contributions if the wholesale provider is  “reasonably certain” that either: (A) the reseller customer is contributing to the USF; or (B) all customers of the reseller are contributing to the  USF. 

• Resellers – If a reseller of telecommunications services is unable to prove a USF exemption, then the reseller is responsible for USF pass-through charges from its wholesale supplier3 in addition to any direct USF contribution obligations the provider may have (i.e., revenue derived from end-user interstate telecommunications services).  Alternatively, a reseller is exempt from pass-through charges from its supplier if the provider can prove a USF exemption.  

Thus, at the federal level, resold telecommunications services are ONLY exempt paying pass-through USF fees if they can prove that they have registered and contribute directly to the USF.  Paying pass-through fees only does not exclude a reseller from the obligation to register and remit USF fees directly.  Resellers have independent obligations to register and pay USF fees on telecommunications/I-VoIP services sold to end-user customers. 

Taxation 

As with federal regulatory fees, retailers of resold telecommunications services may be subject to state and local taxation (“SALT”) regardless of whether their suppliers remitted such taxes.   As with the USF, resellers must register and remit applicable taxes directly to authorities for sales of services to end-user customers. Registered resellers can provide proof of registration and remittance to their suppliers so that the suppliers do not assess pass-through taxes.  If the reseller cannot prove proof of registration (via a resale exemption certificate), the wholesale provider must treat sales of services the reseller as “end-user” sales and bill taxes on the sales to the reseller.  The wholesaler’s billing of “pass-through” taxes to the reseller does not eliminate the reseller’s independent duty of registration and remittance of applicable taxes on its own retail sales.  In other words, the wholesale provider cannot pay taxes “on behalf of” the reseller customer. 

Resale Certificates 

Most states require service providers to prove their tax exemption status by submitting a valid resale certificate. Many states allow providers to complete a state-generated resale exemption form and remit it annually to their suppliers. For sales taxes, many states accept a “multi-state” reseller tax exemption form. Others have their own specific forms, which vary by jurisdiction and tax type. 

Some states generate completed exemption certificates, which resellers can present to their suppliers.   

Summation 

As this Educational Advisory illustrates, the notion that a reseller is exempt from taxes and regulatory fees for services sold to end-user customers if its service supplier pays taxes and fees on the inputs sold to the reseller is a common Myth & Misperception. In reality, telecommunications resellers generally are independently responsible for paying applicable taxes and regulatory fees directly to governing authorities regardless of the conduct of their suppliers. 

Thus, telecommunications resellers should not hesitate to consult with legal counsel regarding the taxability and regulation of their services in a specific jurisdiction. 

Contact Us for Assistance 

Analyzing the tax and regulatory ramifications of your company’s resold telecommunications services is a complex endeavor. But the long-term risks of neglecting this important step can be disruptive and economically catastrophic. 

Attorneys in The CommLaw Group’s Communications Taxes & Fees Practice Group can help you unpack and understand the issues, and how they may impact your business. Moreover, our Attorneys can assist in the development of practical and pragmatic strategies that will enable, and not inhibit, your company’s ability to take full advantage of marketplace opportunities while mitigating exposure to regulatory and/or tax enforcement agencies. 

About The Comm Law Group 

Marashlian & Donahue, PLLC, also known as The CommLaw Group, is a full-service, boutique law firm specializing in regulatory and specialized tax compliance, privacy and data protection, dispute resolution, and commercial law for the communications and information technology industries. Leveraging cutting-edge technologies, including the ethical use of generative AI, The CommLaw Group enhances its expert services to provide clients with innovative and effective legal solutions. Our team of talented, knowledgeable, and personable professionals is dedicated to addressing and solving clients’ challenges with a strategic and pragmatic blend of legal, practical, and political expertise, tailored to meet the specific needs of each client. 

DISCLAIMERS:  This Educational Advisory has been prepared for informational purposes only.   It is not for the purpose of providing legal advice; and does not create an attorney-client relationship between Marashlian & Donahue, PLLC, and you. You should not act upon the information set forth herein without seeking experienced counsel. This Advisory may be considered Attorney  Advertising in certain jurisdictions. The determination of the need for legal services and the choice of lawyer are extremely important decisions, and should not be based solely upon advertisements or self- proclaimed expertise.