VoIP: To Tax or Not to Tax?
Washington, DC, February 17, 2006. To say the telecom industry is undergoing significant change may just be the understatement of the year. But perhaps the underlying facts in support of this not-so-profound observation make for interesting discussion. The recent AT&T-SBC merger, coupled with the prior RBOC mergers over the past ten years bring to mind the well-worn cliché "déjà vu all over again."
It's our opinion however, that these events, along with the seemingly unfair playing field upon which the IXCs and CLECs are forced to compete have spawned creative ways to gain market share without relying on the need to use the "RBOC's" infrastructure (built on the hard-earned ratepayer dollar during the monopoly days). While we cannot say with certainty that VoIP is a complete solution, it's the best option we have seen thus far, but it is not without challenge.
Indeed, the threshold question regarding VoIP seems to be whether it is a telecom service, or strictly an Internet service; good arguments exist on both sides of the issue.
At the risk of over-simplification, proponents with the view that VoIP is purely an Internet service assert there is no meaningful distinction between data and voice in terms of Internet traffic, and therefore should not be subject to different treatment. The Internet passes email, website information, and voice packets from one point to another without regard to the type of information traversing the network.
On the other hand, there are a substantial number who contend VoIP should be treated in the same way as a wireline call since it is ultimately a voice communication that (in most cases) originates or terminates from\to a POTS line. If this "quacks like a duck, must be a duck" view prevails, it's likely to be substantially attributable to the negative impact VoIP and wireless services have had on Universal Service Fund contributions in recent years.
As you are likely aware, in November 2004, the FCC preempted state regulation of VoIP services stating the Commission has the "responsibility and obligation to decide whether certain regulations apply to IP-enabled services," and not the states.
The Commission's move set the table for FCC Chairman Kevin Martin's comments at a Comptel question-and-answer session last December, saying "We need to move to collection for the Universal Service Fund that is technology-neutral." Chairman Martin further added his support to a "numbers-based approach," meaning that taxes and assessments (e.g., USF) would be applied to all phone numbers without regard to the type of technology used for calling.
In lockstep with the FCC, the Government Accountability Office (GAO) released in January 2006 its study of the Internet Tax Freedom Act, which prevents state and local governments from taxing services that enable users to access content, information, electronic mail or other services offered over the Internet. The report revealed the GAO's findings that the tax ban does not apply to "acquired services," that is, the network elements used to deliver the service to the end-user.
The GAO's report drew fire from Democrat and Republican senators alike. Sen. George Allen (VA) countered the report findings saying, "The plain language of the statute, as well as the relevant legislative history, reflect a clear legislative intent to ban Internet access taxes at both the retail and wholesale level."
Sen. Ron Wyden (OR), and Sen. Allen have joined seven other Senate members in introducing a bill that would permanently ban Internet access taxes. As it stands today, the tax ban expires November 1, 2007.
How the feds treat the Internet tax issue will likely be a signal as to how it will treat VoIP services. If Internet services are ultimately taxed, be prepared for a regulatory scheme substantially similar, if not the same as, traditional wire-line service.
If you would like additional information on this issue or on VoIP and telecommunications issues generally, please feel free to give us a call.