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VoIP Service Provider Primer: Compliance with Communications Taxes and Regulatory Fees (Part 2 of 3)

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November 09, 2009

VoIP Service Provider Primer: Compliance with Communications Taxes and Regulatory Fees (Part 2 of 3)

By Jonathan S. Marashlian, Esq., Attorney, Helein & Marashlian, LLC, The CommLaw Group


(Editor’s Note: Jonathan S. Marashlian is the head of the regulatory practice of Helein & Marashlian (News - Alert), LLC, The CommLaw Group. He counsels clients engaged in the IP-enabled communications industry in all aspects of state and federal regulatory and telecommunications tax compliance matters. This is part two of a three-part series on Voice over Internet protocol, or “VoIP” provider compliance with taxation and regulatory fees. This installment focuses on the regulation of VoIP service.)

 
The first question asked by many providers and new entrants is “Are VoIP services regulated?” The quick and dirty answer is, “yes”, but there is very little about the regulatory classification or treatment of VoIP services, either retail or wholesale, that is clear or stable.
 
In contrast to the typical supply chain associated with circuit switched telephone services – which involves a facilities-based wholesaler and perhaps one or two resellers prior to the retail consumer - a voice-bearing IP packet can easily pass through a half dozen hands before being routed to its destination. The result is that there are (1) more companies in the VoIP supply chain and (2) more companies using a wider variety of routing technologies.
 
The supply chain associated with VoIP services creates added complexities in applying the Carrier’s Carrier Rule, or any supply chain enforcement mechanism, to VoIP services.
 
At the federal level, under the CCR, wholesale carriers report revenue from contributing and reporting resellers as wholesale, thereby excluding such revenues from their own federal Universal Service Fund contribution bases. Through its “ancillary” Title I authority, the FCC (News - Alert) generally requires providers of Interconnected VoIP and VoIP Toll (as defined in Part One of this series) to submit regulatory reports, including the FCC Form 499-A, and comply with other applicable rules.
 
Whereas a voice telephone call on the circuit-switched network is always a regulated telecommunications service, not all voice bearing IP packets are regulated. The FCC has drawn distinctions between phone-to-phone, computer-to-computer, and computer-to-phone VoIP communications and applied differing regulatory obligations to each type of service. These distinctions between differing VoIP models make supply chain enforcement of the CCR a difficult task.
 
Generally, state regulation of VoIP is limited to E-911, public safety, customer proprietary network information, and consumer protection. A few states require a registration-like filing from VoIP providers for purposes of gathering information. Currently, state entry requirements (Certificate of Public Convenience and Necessity) and powers to assess state USF contributions are preempted with respect to nomadic VoIP service.
 
States also regulate VoIP through their Departments of Revenue, Comptrollers and other state taxing authorities. The telecommunications-related taxes they assess include:
 
·         Sales and use tax
·         Excise tax
·         Utility tax
·         Gross receipts tax
·         Franchise tax
·         State and/or local E-911 fees; and
·         Select local government taxes
 
Finally, local governments can require VoIP providers to file E-911 periodic reports. We will discuss taxes and fees imposed on VoIP in the third part of this series.
 
Federal Regulation
 
The FCC report that is the most critical filing an I-VoIP or any other provider of interstate or international telecommunications will ever file is the FCC Form 499-A (see box below). The form is due annually and must be filed by April 1st.
 
 
This form and its 50-page, single space, 10-point font instructional manual is the Holy Grail of FCC regulation. In addition to the funds indentified above, revenue data from Form 499-A also serves as the basis for telecommunications annual federal regulatory fees.
 
For any wholesalers out there —including those that are merely transporting or routing IP packets in the middle of a transmission path — the Form 499-A instructions are also important because they establish the parameters of the CCR. Even though wholesale revenue is generally exempt from any and all regulatory fees, the failure to comply with the CCR can result in wholesale revenue (1) being reclassified as retail by the Universal Service Administrative Company or the FCC and (2) subjected to all of the fees for which a wholesale provider’s carrier customer would have been liable. This vicarious liability issue has caused tremendous disruption and confusion in the marketplace.
 
The CCR
 
The CCR is the most well known of the “supply chain” enforcement mechanisms affecting VoIP providers. In 2006, USAC, the USF administrator, created an extension of the FCC’s CCR, which imposes vicarious liability on wholesalers who fail to verify their reseller customer’s status. Wholesale carriers must now implement procedures to ensure they comply with the CCR, because any failure — no matter how slight — could result in the imposition of contribution obligations on revenue that really has no business being subjected to contributions. But, that is precisely how USAC and the FCC are getting carriers to engage in supply chain enforcement.
 
The teeth in the USF program is the fear of vicarious liability.
 
There is nothing terribly wrong with the FCC implementing a supply chain enforcement mechanism. In fact, it is something that was lacking and that resulted in a great deal of imbalance in the retail marketplace because many retailers of telecommunications services simply ignored their duty to contribute. Indeed, the CCR is similar to the mechanisms that have worked fairly well at ensuring wholesalers and retailers are not paying duplicate sales taxes on consumer goods — including such things as traditional switched telephone services.
 
Both the state sales, use and excise tax reseller exemption process and the FCC’s CCR work well when everyone in the supply chain is selling and reselling the same services and products, especially when the services and products have long histories of stable precedent. However, as stated previously, the regulatory classification of VoIP services and related legal precedent is rapidly evolving and is neither stable nor established.
 
While the CCR is only applicable at the federal level and at one government agency, it is one of the biggest regulatory concerns facing VoIP providers. Added to this are the difficulties imposed on VoIP providers by the supply chain enforcement system that is in place in nearly all of the fifty states with respect to sales, use, and excise taxes, as well as 911 fees. These difficulties stem from the fact that no two states define a taxable VoIP service the same way, and the only thing that matters to the states is THEIR state definition of telecommunications or telephony, irrespective of the FCC’s definitions.

State Regulation 
State regulation of VoIP services is confused and confusing, plain and simple (see Box 2). The states outlined in Box 2 are just an example. Within each of these states, the application of these requirements can depend on a wide variety of factors, such as:
 
1.      Is the service nomadic or is it fixed?
2.      Is the service associated with a static IP address or is it over the top?
3.      Do the fees apply based on the jurisdiction of the calls or the location of the billing address?
 
 
Since there are numerous differences in the way states regulate VoIP, to ensure compliance in this day and age, each company should to conduct its own legal and regulatory risk analysis. Ignorance is no defense of the law, no matter how confusing and impossibly frustrating the law might be.
 
Federal and State Interaction
 
To the states, the FCC definitions merely serve as a guide, and states make their own laws based on their own definitions of communications services. To the extent these definitions do not result in a state regulatory regime that is inconsistent with or preempted by the federal structure, there is often a degree of overlap. For example, states are not preempted from enacting CPNI rules which are not inconsistent with federal CPNI rules. Thus, if an entity is in compliance with FCC CPNI rules (which are applicable to I-VoIP providers), it is likely in compliance with state CPNI rules as well. Likewise, there is a great deal of similarity in state public safety, consumer protection and unfair trade practices statutes.
 
However, providers should be mindful that there are often subtle, as well as not so subtle, differences between federal and state regulation. Thus, even when the state and federal regulations appear consistent, there are nuanced differences that providers must take into consideration. These subtle, nuanced differences between the federal and state regulatory schemes are even felt with respect to “market entry” regulation, an area most would agree the FCC has clearly and unequivocally preempted.
 
For instance, even though state licensing requirements, such Certificates of Public Convenience and Necessity, are preempted, a handful of state commissions (such as Montana and Nebraska) nevertheless require I-VoIP providers to register. In fact, as of June 30, 2009, the Indiana Utilities Regulatory Commission required all communications service providers, including providers of Internet protocol enabled services, to file an Application for a Communications Service Provider Certificate of Territorial Authority (“CTAs”). Even though Indiana routinely grants CTAs automatically after thirty days, the process of seeking a CTA is still much more substantial than a mere “registration” or notice filing. To date, no party has challenged Indiana’s requirement as being preempted by the FCC, which technically means that Indiana’s requirement remains the law of the land in Indiana and must be obeyed.
 
Yet, with as much encroachment as there apparently is, there are states which claim not to regulate VoIP at all. According to public pronouncements, these states reason that adherence to FCC “preemption” holdings requires them to refrain. While such public pronouncements should provide clear-cut guidance, even here, there is no “bright line” test, and these pronouncements are not fixed in stone.
 
The Vonage (News - Alert) Preemption Order
 
Pursuant to 2004 amendments to the Internet Tax freedom Act (Internet Nondiscrimination Act, Pub. L. 108-535, Stat. 2615 (2004)), the federal prohibition against taxation of Internet services specifically excludes VoIP services. One of the gaping holes in the Vonage Preemption Order from 2004 (discussed is Part One of this series) is that it did not expressly preempt state commissions from applying taxation and generally applicable E-911, public safety, CPNI and consumer protection statutes to I-VoIP providers. A strict reading of the 2004 FCC’s Vonage Preemption Order reveals that the FCC’s explicit preemption is narrow in scope. State PUCs have seized on this in support of their argument that the FCC’s decision cannot be interpreted to preempt the imposition of state USF contribution obligations on nomadic VoIP providers.
 
To date, Vonage has been relatively successful in fighting off attempts by states to impose state USF contributions requirements on its services, most recently winning a victory over the Nebraska Public Service Commission before the U.S. Eighth Circuit Court of Appeals. However, the states have not been deterred by adverse court decisions and continue to push for more authority over VoIP services. In a recent petition to the FCC, Kansas and Nebraska cite to the FCC’s own statements, contained in an amicus brief filed before the Eighth Circuit, in support of their position that the FCC has not preempted their ability to impose state USF requirements on nomadic VoIP services.
 
While there remains some ambiguity as the states’ ability to impose state USF requirements on VoIP services, there is less doubt with regard to the states’ ability to impose taxes and E-911 fees on such services. Seizing the opportunity to replenish depleting state revenues, several states published guidance on the application of their existing tax provisions to VoIP services. Many announced that VoIP qualifies, under state tax law, as a taxable telecommunications service. For example, Illinois and New Jersey both explicitly clarified that VoIP falls within those states’ tax code definitions of “telecommunications.” Likewise, Pennsylvania stated that VoIP did not come within the state’s sales tax exemption for enhanced telecommunications services. The import of those interpretive rulings is that the state codes at issue were always broad enough to include VoIP as a taxable service.
 
Absent any federal preemption whatsoever with regards to a state’s legal authority in these areas, states have been and, indeed, are free to apply their own statutory definitions of “communications” and “telecommunications services” when seeking to find sources of tax revenues or finding entities to remit fees that support E-911 services in their state.
 
That is precisely what more and more states have done over the past several years. States are increasingly becoming vigilant in their enforcement of their “tax” and “911” regulations against providers of VoIP communications services. For all intents and purposes, with the exception of a small handful of states which have affirmatively decided not to “tax” VoIP, the vast majority of states now apply the same tax/911 requirements to VoIP services as have applied to traditional “telecommunications services” for decades.
 
911 Regulations
 
There is another unique, and uniquely important, type of regulation – 911 emergency services regulations. Virtually all states have generally applicable E-911 regulations. It is fully expected that in the months and years ahead, more and more of these regulations will be aggressively enforced against all types of VoIP providers, both fixed and nomadic.
 
Next week: We look at taxes and fees imposed on VoIP services.

Jonathan S. Marashlian is the head of the regulatory practice of Helein & Marashlian, LLC, The CommLaw Group. To read more of his articles, please visit please visit his columnist page.

Edited by Michael Dinan







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