MODAS Systems
Panacea Of Tax Conundrum

The concept of “machines talking to each other” has been in the pipeline for about a century, but the last two decades have unequivocally witnessed the most significant growth in this landscape. Currently, prospects for Machine-to-Machine (M2M) do point upward to the near future and the market anticipates to touch around $35 billion by the end of this decade. For the incumbents, however, there is a pressing need to extend their focus beyond just innovation. A share of it ascribes to M2M service providers’ reliance on network carriers for connectivity, which also puts them in the league of telecommunication carriers. Although the jurisdictional registrations and taxes they need to collect while billing amplify and complexify in accordance, the truth is, many M2M incumbents are neither properly registered nor do they collect the prescribed taxes and fees. “This majorly happens due to a service provider’s lack of understanding about the appropriate legalities, because the carriers supplying the wholesale connectivity cannot provide that guidance,” says Joel Urano, President and CEO, MODAS Systems. His Dallas based company, despite being founded in early 2016, is today making headlines by pioneering how M2M incumbents bill their customers, ensuring that prescribed taxes and jurisdiction registrations do not come in the way of providing state-of-the art services.

Urano admits that there indeed are a number of other companies which provide powerful solutions for billing, taxation, and regulatory compliance, but points to the vacuum existent in the market before MODAS’s inception.

“There was no company that tied all these functionalities together taking on the role as the telecommunications provider.” “Additionally, many solution providers are using off the shelf software to bill for telecom bundled services. However these software programs are not capable of the complex rating, mediation and tax calculations required for telecom subscription billing. The fact that our solution brings together strategic alliances with leading telecom billing platforms, tax engines, and regulatory compliance firms makes us a contrasting solution in the entire market right now,” adds Scott Ellis, SVP Sales, MODAS.

Elaborating on the challenge that pushed the team at MODAS to foray alone in the market, Urano states, “When tier one carriers offer voice, text, and data reselling packages to smaller carriers and M2M service providers, they do not divulge details about the subsequent taxes their clients ultimately need to levy on the end user. This is because they don’t want to take on the liability for providing tax or legal advice to their partners.” The result is a “tax nexus” wherein companies align with the perception of traditional tax setup where absence of physical presence in a jurisdiction precludes them from taxing the end user. In reality, in accordance with the Mobile Telecommunications Sourcing Act, telecommunication services are taxed based on a customer’s place of primary use.

We become the carrier for service providers that takes up the onus of registering, charging, filing, and paying taxes to every jurisdiction they sell their service to, on their behalf, as their partners

In addition, it is important to note that telecommunication taxes, unlike tangible commodities tax include various inclusions such as 911 fees, USF, and gross tax receipts and many others. Most of these inclusions change based on the jurisdictions, both in their nomenclature and the rates incorporated.

Ellis points out how most carriers separate themselves while they sell service providers wholesale data. Most often, an aggregator or carrier asks for a multi-jurisdictional sales and use tax exemption form. However, this form is only valid for Sales & Use taxes and not for the slew of other applicable telecommunications taxes, fees, and surcharges. Additionally, some states listed on the form do not accept this as complete and valid tax exemption documentation. The form exempts the aggregator from any tax implications in the future and the client is left alone to fight the legal battle that ensues.” The conundrum of the myriad of taxes multiply exponentially in light of the fact that most M2M players today do business in multiple states and the requirements vary by not only state but jurisdiction within a state. To gauge the gravity, consider the fact that there are over 70,000 jurisdictions in the U.S. Finally, the whiplash falls when a service provider gets audited and a pile of past tax liabilities is conjured.

The laceration, however, is bore by the ultimate consumer when the built-up tax liabilities along with penalties get transferred to him/her owing to the fact that telecommunications taxes are almost exclusively the liability of the end user. “Ultimately, if you are not properly billing and taxing your customers, you may be putting them at risk for a tax audit and it is not likely the customer continues their relationship with your company if that happens,” warns Urano.

This is where MODAS’s market posture wins big and grabs attention particularly in light of the fact that much older players of the space have chosen to overlook this widely common challenge. “In our model, we become the carrier for service providers and take up the onus of registering, charging, filing, and paying taxes to every jurisdiction they sell their service in, as their partner,” apprises Urano. The billing platform is fully automated that keeps track of the taxes a service provider needs to charge, irrespective of its own location but depending on the location of the end customer. “As our relationship with the client establishes us as the carrier of record, MODAS becomes the entity to audit. This ensures that the client is relieved of the hassles of taxation and regulatory compliance and focus on what it does best.”

Another way service providers fall into the tax conundrum is by focusing only on simplifying their bills to the customer. While it may look attractive up front, most companies fail to account and add the components that make up their service to appropriate tax buckets which may include data plans, software, and hardware. The complexity aggravates as the jurisdictional coverage of a business expands. “For every new client, we take time to fully understand the service they offer and their underlying components and then allot proper tax buckets based on every jurisdiction they operate in. This ensures that proper books and records are maintained for defense in the event of an audit.” He adds that MODAS’s business model is designed to act like an incubator wherein companies after gaining confidence in multijurisdictional taxation and regulatory compliance can decide to take the process in-house. “Once they decide to do so, our system allows them to carve out their entire process and enables a seamless migration.”

"MODAS’s business model is designed to act like an incubator wherein companies after gaining confidence can decide to take the billing and taxation process in-house"

While it is understandable that being a relatively new platform innovation is paramount for MODAS, what inspires is the distance they are ready to go in order to innovate—even daring to turn off an underlying component when there are only three. What eventuates is even more inspiring. “We discovered that by turning off a specific component, we could provide the same platform as a solution applicable for different use cases,” Urano states. He exemplifies with school districts that are leveraging MODAS platform, minus its regulatory component. Many school districts today give out tablets to students, replacing textbooks completely, and all they want is to track the devices and bill parents accordingly. While the proposition appears attractive from a standpoint of leveraging technology to enable education delivery, this puts students without internet access at a disadvantage. “School districts loan out MiFis in such scenarios, and we are helping the district’s discounted pricing reach the disadvantaged child, while ensuring that the district can efficiently invoice the appropriate bill for such parents.”

Tracing back to the challenge, Urano remarks that awareness among M2M service providers regarding the same is paltry due to the fear of jurisdictional crackdown amongst a sizeable lot that has incurred huge tax liabilities over the years. While MODAS stands vocalin repudiation, the prevailing atmosphere worsens the situation, particularly for the new entrants who face the risk of ending up in the same pit. “We can help the companies who have had not any tax vulnerability yet from falling into that pit. As for the ones already are in the pit, we can’t undo their past but, once they decide to climb out, we can help ensure that they are compliant moving forward while affording them time to straighten out the past.”