FCC Takes Over VoIP Regulation

On a 3-2 ruling, the agency decides that only it has the power to regulate IP-based telephony, and not the handful of states and, more recently, municipalities, that had been trying to involve themselves in the technology. Service providers laud the ruling, though it's not clear if it will have an impact on state and local taxation issues.

The regulatory picture for VoIP is becoming clearer as the Federal Communications Commission has ruled that it, and not individual states, can regulate rates, terms and conditions of service.

Though the ruling didn’t specifically mention municipal regulations, the FCC’s position is expected to supersede recent local attempts on the part of a number of cities in Southern California to regulate the industry.

The ruling is also likely to blunt municipal and state attempts to tax VoIP providers, though the ruling’s affects on taxation are much less clear.

In its 3-2 ruling, the FCC found that Vonage’s VoIP DigitalVoice phone service is “interstate” in nature, meaning that individual states cannot regulate Vonage as it would a traditional telephone company, nor regulate the rates, terms and conditions of Vonage’s service.

The FCC was acting on a petition from Vonage seeking federal preemption of an order by the Minnesota Public Utilities Commission, the FCC found that the company’s DigitalVoice service can’t practically be separated into intrastate and interstate components, precluding dual state and federal regulatory regimes.

The FCC stated that other types of IP-enabled services, such as those offered by cable companies, that have basic characteristics similar to DigitalVoice would also not be subject to traditional state public utility regulation.

“This is an incredibly positive development,” said Bill Wilhelm, outside counsel for Vonage and partner at Swidler Berlin Shereff Friedman, Washington, D.C. “The ruling is unambiguous, and prevents Vonage from having to deal with a patchwork quilt of tax statutes in each of the states.”

The decision adds to the regulatory certainty the FCC began building with orders adopted earlier this year regarding VoIP that the FCC rather than state commissions, has the responsibility and obligation to decide whether certain regulations apply to IP-enabled services.

“Since 1870 home telephone service has been essentially the same—two phones connected by a wire. This landmark order recognizes that a revolution has occurred. Internet voice services have cracked the 19th Century mold, to the great benefit of consumers,” said FCC Chairman Michael Powell in issuing the ruling. “VoIP services certainly enable voice communications between two or more people, just as the traditional telephone network does, but that is where the similarity ends. Internet voice is an Internet application that takes its place alongside email and instant messaging as an incredibly versatile tool for communicating with people all over the world. As such it has truly unique characteristics.

“It’s not clear how this will affect taxation issues,” said company spokeswoman Brooke Schulz. “This was a regulatory ruling, which should be viewed separately from other issues.”

The taxation issue had come to the forefront in recent days as some VoIP providers revealed they had received letters from some Southern California municipalities demanding that they collect and remit utility user taxes from their customers.

“We were concerned about dealing with 50 different state jurisdictions,” said Ravi Sakaria, president and CEO of VoicePulse, Inc., Jamestown, N.J. “We and the other VoIP providers are very small. It would be costly and time consuming for us to handle that on many fronts. To have to face [taxation] at a municipal level is even more scary.”

VoicePulse received identical letters Friday from the governments of Burbank and El Monte, Calif., demanding that the company charge local users and pass along to the cities a 7 percent utility users tax.

Clara Wong, deputy city manager for administrative services for El Monte, confirmed that the city had sent out the letters to the top 10 to 20 VoIP providers and eventually will send them out to other providers. Officials for Burbank didn’t return calls.

“If you pay federal excise tax, then you are subject to the local utility tax,” each of the letters said.

“There are a lot of issues regarding this,” Sakaria said. “How do you determine a customer’s place of primary use? We don’t know where the customer is. Even if a customer gives a Burbank billing address, that doesn’t mean that the customer is [physically located] in Burbank. We would have to figure out the customer’s primary place of use.”

Tuesday’s ruling cited the interstate nature of the VoIP business, but didn’t specifically mention tax issues.

Yet the ruling likely will set a precedent for taxation at the federal level, rather than at state and even municipal level. Some California municipalities had contacted some top VoIP providers, including VoicePulse and 8×8, demanding that they collect and remit utility user taxes. Schulz said she was unaware if Vonage had received any such correspondence.

Bryan Miller, chairman of 8×8 Inc., also applauded the FCC ruling, saying that he expected the FCC’s action would likely protect VoIP providers from taxation at the state and local levels. His company had received letters from Burbank, El Monte and Huntington Beach seeking to collect local taxes.

“We’re very pleased with today’s ruling and we commend the chairman’s leadership on establishing jurisdictional framework at the federal level for VoIP services like ours,” Schulz added.

“This forward-thinking decision from the FCC assures that competition from VoIP is here to stay,” said Vonage CEO Jeffrey A. Citron in a prepared statement. “Now we can focus our resources exclusively on building an even better service—rolling out E-911 for all our subscribers, innovating new features and new devices for VoIP, and expanding aggressively around the globe. Because the FCC has acknowledged the reality of the Internet—which knows no state boundaries and no borders—more people will enjoy the benefits of Internet phone service.”