Whether a telecommunications carrier decides to handle its billing in-house or to outsource it, many CLECs are looking to an outside source to handle the complex problem of dealing with the various fees and taxes they are required to pay and collect.
Adding to the complexity of the tax issue are the various jurisdictions with which a typical CLEC may have to deal. Each one of those jurisdictions--municipal, county, state and federal--often has a variety of taxes or fees that they require each CLEC doing business there to collect.
"It can be quite complex, depending on how many different jurisdictions [the CLECs] operate in," says Robert Lane, a Consumer Market Convergence program manager at the Yankee Group (www.yankeegroup.com). "If they operate in major markets across the country, each market may have a slightly different tax structure and fees required by state and local government."
Lane explains that there are two types of taxes carriers have to deal with: taxes on the company itself, such as property taxes; and various surcharges and fees for which the carrier acts as a collector for whichever jurisdiction is levying them, much in the same way a retailer collects sales tax from each customer for states, counties and municipalities.
Lane suggests that all these differences can be especially confusing for new and emerging CLECs who don't have experience in dealing with them. He says that "basically these differences are a common part of doing business; the ILECs sort of already have learned those differences" over the decades.
For the CLEC, however, as it expands its reach into new markets, each new market brings new challenges.
Much like the regulatory specialists that help them deal with various governmental issues, CLECs need people who are knowledgeable about the various tax structures and can help the company build them into its accounting software from the beginning.
Lane adds that they'll have to be careful not to assume that each jurisdiction is going to be the same because, in addition to the various state and local taxes, there may be regulatory fees tacked on, and those fees may vary by service and the state in which it's being provided. In California, for example, carriers are responsible for collecting fees for universal services programs that include 911 service, support for deaf and disabled telecommunications services, and a grant program for schools and libraries. Those fees amount to approximately $750 million a year.
Tammy Aziz, director of billing for the Lake Mary, Fla.-headquartered CLEC EPIC Communications Inc. (formerly Telephone Company of Central Florida), says that trying to deal with those taxes and fees without relying on a company that specializes in that area "would be a nightmare."
EPIC is a client of BillSoft Inc. (www.billsoft.com), a Kansas-based provider of taxation solutions.
"[Taxation] is very complex because you're dealing at the USOC [Uniform Service Order Code level] to get the proper tax codes associated with our data," Aziz says. "But going into the BillSoft modules, if we have the correct data in our database, then the correct information comes out of the BillSoft modules."
Jerry Gimnich, vice president of information technology for 3-year-old Sage Telecom Inc. (www.sagetelecom.net), which uses the UNE platform (UNE-P) and has more than 100,000 customers, says "it would be almost impossible" to deal with the taxation issue on its own.
"You'd have to hire a staff that would continue doing research and keeping track of the changes in each little municipality, city or jurisdiction," Gimnich says. "You'd have to have a staff of people that had their ears to the regulatory [world] and listened for all the changes and [kept up with] journals or something to help you be made aware of all the changes."
Gimnich says that while it's relatively easy at the state level because you mostly just have to see what the PUC is doing, "when you get to the city and county, you have to have feelers out."
Importance of Being Accurate
It's critical to be complete and accurate about the various taxes and fees because the penalties for failure to properly collect them can be severe on a number of levels. If a CLEC were to be negligent in that area and get audited, a state can force it to pay the taxes and fees--and may assess interest and penalties--or force it to collect the back taxes and fees from its customers. That could result in an unbudgeted debt or a very unhappy subscriber base that may jump to a competing carrier.
In addition, state regulators likely will maintain a closer watch on the CLEC during the next fiscal quarter. Further problems likely will result in even more penalties and fines, and possibly loss of certification to do business in that state.
While the PUC isn't there to put any CLEC out of business, and it's unlikely anybody would be hauled off to jail, "it becomes a huge nightmare if you don't collect the proper amount and remit that on to the proper authorities," Gimnich says.
BillSoft president and founder Tim Lopatofsky says large CLECs often are able to handle taxation with their own staffs because "when you look at it in proportion to their revenue and their cost, it's not as significant as the other things they have to do." So, he says, they can afford the cost of having 50 or 60 people in their tax departments and the resources necessary to gather the required data and information.
For a smaller CLEC, it can be a huge burden, Lopatofsky says. That's because the scope of the complexity of the problem doesn't diminish much, if at all, with the CLEC's size because even a small CLEC may be doing business in a market with myriad jurisdictions, each with its own tax rules.
The software required to deal with the problem is equally complex. Lopatofsky says BillSoft's EZTax system has about a million lines of code.
Joseph Isaacs, CEO and founder of ISG Telecom Consultants International (www.isgtelecom.com), doubts that most of the new CLECs, regardless of whether they're small or medium-sized, "understand the complexity of the taxing scenario."
Isaacs says that it's not simply a case of each CLEC having to pay a variety of standalone taxes, which would be relatively easy to calculate. In many cases, CLECs face what he describes as "piggyback taxes," which are taxes levied on a product or service and any taxes already levied on them. For example, if a CLEC charges $10 for a service and pays Tax A at 2.3 percent, the total bill to the customer would be $10.23. The CLEC also has to collect Tax B, a piggyback tax not on the $10 charged for the service, but on the $10.23. And the CLEC may have to collect a number of such taxes.
"It makes it a little bit more complicated," Isaacs says.
In attempting to deal with taxes and fees, Isaacs says a number of factors have to be considered, such as the CLEC's size, the number of jurisdictions it does business in, the methodology or systems used for its billing and OSS functions, and whether it's facilities based or a reseller.
Isaacs says one mistake many of the smaller reseller CLECs make is not going through the process of becoming tax-exempt when their purchases come from the ILECs. In order to buy services from an ILEC, a resale CLEC is responsible for certain taxes, such as sales taxes and some excise taxes. For example, a competitive reseller has to collect from its customers and remit the federal excise tax. However, a CLEC can avoid paying the federal excise tax by obtaining an exemption certificate that shows the service is being bought for resale. CLECs that lack tax-exempt status are responsible for their own tax calculations. However, if the CLEC is tax-exempt, the ILEC computes all the necessary taxes and then simply bills the CLEC, which relieves the CLEC of having to do some of its own tax calculations.
Facilities-based CLECs don't have the tax-exemption option. However, they also may pass on the problems of dealing with taxes by outsourcing billing to a service bureau, which would then put the tax-calculations burden on the service bureau's shoulders, leaving the CLEC simply responsible for the reporting end of it.
Isaacs says there are probably only a half dozen companies across the country that can deal with the myriad complexities of telecommunications taxes, which he says are far more difficult than what most corporations have to face.
CLECs, especially the smaller ones, should not try to offer every imaginable type of telco service, but rather just initially focus on a limited number of services. Isaacs says most new CLECs lack the ability to focus on their core competency--building, operating and supporting a communications network--while also having to be their own taxation service bureau.
The easiest solution for CLECs is to go with a third-party vendor for billing because that vendor already will have a tax calculation module built into its billing software.
"Therefore the CLEC only has to get reporting from the billing vendor in terms of what taxes they've been charged," Isaacs says. "Then they have half the headache of compiling various tax reports, which they can outsource. Obviously that eliminates a tremendous amount of pressure."
EPIC Communications had been outsourcing its billing to a company that for tax calculations used Pennsylvania-based Vertex Inc. (www.vertexinc.com), a manufacturer of tax compliance software since 1974. However, when EPIC decided last year to bring its billing in house, it chose to still outsource the taxation element, selecting BillSoft to handle it.
Aziz estimates that if EPIC were to attempt to handle the taxation on its own, it would need additional staff of one person for every two states.
"I wouldn't even attempt to try it, to be perfectly honest with you," Aziz says.
Sage Telecom's Gimnich says his company has been very pleased with its relationship with BillSoft. He says that when putting Sage's billing system together he was "pretty adamant" about using an outside source for the taxation end. He says the final choice for a taxation company came down to being between Vertex and BillSoft.
Gimnich says that neither BillSoft nor any company is going to be 100 percent accurate, "but they give you a much better chance" of keeping track of all the tax data and information a CLEC requires.
BillSoft, Vertex and other such companies send out monthly updates to their customers to help them keep abreast of changes to the tax rates and regulatory fees.
But, "[any of these companies] will tell you that some things change out there that just don't become visible to them until somebody has a customer or something happens in that city or county or state before they become visible," Gimnich says.
The companies' customers act as information sources, letting the vendors know when and what changes have taken place. Gimnich says Sage gets information from the local jurisdictions that it can pass along to BillSoft.
"We're here in Texas and they are out of state, so they may not know of something that happened here," Gimnich says.
