Note 51: Bill Cycle Taxation

Posted: 27 April 2008

Taxation

Taxation is an additional layer of complexity that overlays the complexity used to determine the price of a charge. Customer's charges are likely to be taxed in the same manner even when calculated differently: one a recurring charge with a flat rate of $10 per month and the other an equivalent charge that uses a complex algorithm to arrive at the same price of $10 per month.

The manner in which taxes are calculated is related to the taxable jurisdiction(s) within which the biller operates rather than the industry or the competitive landscape. Each charge may be subject to more than one tax depending on the taxing jurisdiction, and there may be more than one taxing jurisdiction that applies.

Not all billers will need to apply tax to their charges. Jurisdictions without sales or value-added taxes may not tax individual transactions. Some billers' products and services (e.g. water) may not be taxable though the biller may provide additional services that are.

Whilst transactions processed from external parties may have been pre-taxed, most charges will need to be assessed for tax within the billing cycle (even if the rate is assessed at 0% for some products). Taxation can be applied as part of the rating process, but if the calculated price is discounted or recalculated in the billing cycle, then the tax applied may require recalculation. Ideally, taxation is calculated only once against the final price after all discounting and rerating has been performed.

Tax calculations require specific details about the product and, depending on the country, can require specific location details about where a transaction was performed to correctly assess the taxes to be applied. For example in the US, the taxation for a phone call can depend on the tax jurisdiction of the calling number, the called number and the charged party's billable address. Based on this information, the appropriate taxing jurisdictions can be determined for the taxes applicable at a federal, state, county and/or city level. Jurisdictions levy different taxes using different rates, with some taxes being fixed amounts, whilst others are based on a percentage of the charge.

Taxing jurisdictions can differ in how they classify a biller's products affecting the tax that is calculated. Taxation is an area of billing that needs to be carefully considered when implementing new billing systems since the important decisions are made by outside parties (tax departments) that are unconcerned about the difficulties that implementation might present. The accurate calculation and collection of tax with auditable record keeping will provide the necessary support if the taxing jurisdictions applicable to the biller ask for justification of their takings.

Discount and rate plan thresholds

Taxation affects the total price of a charge and may influence how rates and discounts are applied. Care must be taken when defining discount and rate plans to consider both the timing of when discounts are applied, and which fields are referenced when specifying rating methods and discount thresholds. A consistent approach when deciding if a threshold has been reached (e.g. is the pre- or post-tax amount used), what to discount (e.g. the total taxed price, or just the original charge), whether the taxation needs to be recalculated (e.g. for taxes proportional to the charge), and even whether the taxes can be recalculated (e.g. for pre-taxed charges supplied by third parties).

For example, the biller's marketing may describe a 20% discount for phone calls over $11. The discount threshold may need to be configured using a $10 threshold and use the pre-taxed charge amount if the $11 is composed of a $10 charge and $1 of tax (10%).

Prepaid charges

Since prepaid transactions deduct their full value from the customer's prepaid balance, any tax included in the transaction's full value must be included. Depending on the jurisdiction and product, the tax applied to fixed value products (e.g. music downloads, bridge crossings, tollway journeys) can be determined ahead of time and included as part of the rate plan, or an associated database.

Other situations are more dynamic (e.g. a mobile phone call, internet dial-up connection), and may occur in a variety of jurisdictions with different tax regulations. In these cases, both the rate and taxes that apply must be determined and applied before deductions are performed against the customer's prepaid balance. To support this situation, both the rating and taxation platforms may need to be available at all times and with sufficient responsiveness (performance) to respond in the timeframes required for prepaid network processing.

Tags: Billing, Taxation, Jurisdiction, Prepaid