February 9, 2007 12:32 PM PST

Federal appeals court weighs Internet phone taxes

WASHINGTON--A federal appeals court panel on Friday heard a challenge against taxes that were extended last year to some Internet phone providers, but the judges did not clearly signal how they might rule.

Some members of the three-judge panel at the U.S. District of Columbia Circuit Court suggested the Federal Communications Commission had not fully justified certain requirements it imposed in an order last June. The panel appeared less swayed, however, by arguments that the FCC had overstepped its authority in setting the mandate.

At issue is a unanimous FCC decision to require all voice over Internet Protocol (VoIP) services that connect to the public-switched telephone network--as opposed to using peer-to-peer technology, such as Skype--to contribute a percentage of their long-distance revenues to the Universal Service Fund. The multibillion dollar pool of money subsidizes telephone service in rural and low-income areas, certain health care providers, and schools and libraries. Previously, specific contribution requirements existed only for wireless and wireline telephone carriers, leaving it less clear where VoIP fit in.

If the FCC's rules are upheld, Americans could continue to see taxes levied on their VoIP bills--and at a steeper rate than on their cell phone or wireline bills. That's a situation the relatively young VoIP industry fears will drive away business.

Leading VoIP provider Vonage challenged the order, arguing that it discriminated in multiple ways against Net phone companies. When the FCC proceedings were unfolding, an Internet phone industry group argued that the new rules would lead to $2.12 extra on the average VoIP customer's $30 monthly bill, as opposed to $1.38 for wireline customers and $1.21 for wireless subscribers. (Companies typically pass on their contribution fees to their customers.)

The FCC said it made that decision because the fund hinges on long-distance revenues, and it believed VoIP markets itself as carrying more long-distance calls than rival services.

Christopher Wright, an attorney for Vonage, told the judges his client was not opposed to contributing to the fund. Rather, the company believes it should have the option of paying a rate more comparable with those required of cell phone companies.

"It's simply not reasonable to think that a company that offers local and long-distance is analogous to a company that only offers long-distance," he told the judges.

Two of the judges took issue with that argument. Judge Merrick Garland suggested he didn't believe the contribution rate for VoIP services should be viewed in the same way as wireless services because, in his view, a larger percentage of cell phone calls are local. Judge David Tatel called VoIP a "completely different kind of service" than wireless.

The Computer and Communications Industry Association, which backed Vonage in the proceedings, went further than the Net phone company, arguing that the FCC had no authority to require such payments from VoIP services in the first place. Under federal law, only telecommunications services are supposed to contribute to the fund, and the FCC has not yet ruled whether Internet phone companies fall into that category, argued attorney Glenn Manishin.

Those assertions incited sharp questioning from some of the judges. "What language in the statute supports that?" Judge David Tatel asked.

But Judge Harry Edwards later pressed FCC attorney James Carr to spell out the agency's legal defense for extending the requirements to VoIP services. "You have a track record today of arguing, resting on nothing," he said.

Edwards was the same judge who called the FCC's arguments "gobbledygook" and went on to dissent last year when the rest of his panel upheld federal rules extending wiretapping requirements to Internet providers.

The panel also grilled Carr on two sections of the FCC's order (PDF) that Vonage held were unfair. One portion that attracted particular attention requires VoIP providers not only to pay directly into the Universal Service Fund but also, for the next two quarters, to continue paying any USF-related fees requested of them by the telephone companies whose wires they lease. Some telephone companies have long collected such fees from VoIP firms that use their facilities, and those fees already show up on some VoIP bills, including Vonage's.

The FCC argued the temporary requirement is designed to make up for any shortfalls that might occur when telephone companies no longer have to collect those fees. But Vonage and its supporters argued it amounts to double payment.

Judge Garland pushed Carr to defend the move. "The only rationale given in the rule is we need more money, so let's take it from them," he said.

"It seems unreasonable," Judge Edwards added.

The case came before the panel as both the FCC and Congress continue to ponder even more sweeping changes to the contribution structure of the fund. They argue that the era of all-inclusive cell phone plans has eroded long-distance revenues--and thus the size of the fund--and could shortchange zones in need of financial help. Some have even called for expanding the system to tax and finance broadband connections.

After more than an hour of oral arguments, the panel took the case under advisement. A decision is expected in a few months.

See more CNET content tagged:
Internet phone company, Internet phone, VoIP, Vonage Holdings Corp., VoIP service

16 comments

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No long distance = No Fee?
How about if I don't use long distance on my phone, can I forgo paying the fee. I have Vonage which includes LD but I don't ever use it.
Posted by stlwest (72 comments )
Reply Link Flag
Are you kidding?
There will Always be this fee whether you use long distance or not. Its just another gestapo scam by the government to take from the haves and give to the have nots.
Posted by enscorp (49 comments )
Link Flag
No long distance = No Fee?
How about if I don't use long distance on my phone, can I forgo paying the fee. I have Vonage which includes LD but I don't ever use it.
Posted by stlwest (72 comments )
Reply Link Flag
Are you kidding?
There will Always be this fee whether you use long distance or not. Its just another gestapo scam by the government to take from the haves and give to the have nots.
Posted by enscorp (49 comments )
Link Flag
tax on tax
sheesh,always a new way to double tax us.
Posted by stltransplant (2 comments )
Reply Link Flag
tax on tax
sheesh,always a new way to double tax us.
Posted by stltransplant (2 comments )
Reply Link Flag
Tax us whatever you want.
Feds, go ahead tax us all you want. We apparently have no power to stop you (or even a right to question) so why use restraint? your stealing the American peoples money by force.. why bother to hide it?
Posted by Solaris_User (267 comments )
Reply Link Flag
Tax us whatever you want.
Feds, go ahead tax us all you want. We apparently have no power to stop you (or even a right to question) so why use restraint? your stealing the American peoples money by force.. why bother to hide it?
Posted by Solaris_User (267 comments )
Reply Link Flag
Take my children too!
I got a email the other day from my VOIP company packet 8 informing me that my bill was going up. I like many of you try to use technology to my benifit. I jumped on the VOIP band wagon years ago to avoid the games that traditional phone companies play. Now that it has become much more main stream it may be time to find something new. Although I was glad to see that Vonage had taken a stand and is pushing the issue of unfair or over taxation. Go Vonage. You know I am tired of over paying for everything, I pay a ton for my highspeed internet, cell service, tv, and now my VOIP is going to join the list. Lets all take a stand like vonage and make sure that we speak out and make sure that we are not unfairly charged or taxed.
Posted by mitchcat (2 comments )
Reply Link Flag
Take my children too!
I got a email the other day from my VOIP company packet 8 informing me that my bill was going up. I like many of you try to use technology to my benifit. I jumped on the VOIP band wagon years ago to avoid the games that traditional phone companies play. Now that it has become much more main stream it may be time to find something new. Although I was glad to see that Vonage had taken a stand and is pushing the issue of unfair or over taxation. Go Vonage. You know I am tired of over paying for everything, I pay a ton for my highspeed internet, cell service, tv, and now my VOIP is going to join the list. Lets all take a stand like vonage and make sure that we speak out and make sure that we are not unfairly charged or taxed.
Posted by mitchcat (2 comments )
Reply Link Flag
Down With The FCC & The Tax Fund
The original impetus for extending this tax was from the baby bells that wanted to saddle upstart VOIP companies with as many hardships as possible. They also successfully petitioned so a 911 fee would be needed as well. The FCC is always more than willing to expand their authority whenever possible. What really needs to be done here is the dismantling of both the FCC and the Universal Fund. This rat hole where billions upon billions each year are fed is mismanaged and ill conceived. Has anyone ever seen an accounting statement of how this money is spent? Why should we be subsidizing phone service in rural areas? Why should we be paying for phone service in libraries? Get that money from local taxes and not from someone's wallet in another state.
The FCC is largely a disgrace. An assuming, arrogant agency always grasping for more authority and mostly serving large corporate interests at the expense of the average citizen. Look at how these morons even continue to differentiate between "local" and "long distance" calls and therefore how each should be separately regulated. Those quaint and artificial distinctions should be abandoned in the new reality of current telecommunications. Another example of clinging to the past is the different regulations for cable vs. telecommunication companies. These corporations offer convergent services and should be regulated in a similar manner.
Posted by zanzzz (138 comments )
Reply Link Flag
Down With The FCC & The Tax Fund
The original impetus for extending this tax was from the baby bells that wanted to saddle upstart VOIP companies with as many hardships as possible. They also successfully petitioned so a 911 fee would be needed as well. The FCC is always more than willing to expand their authority whenever possible. What really needs to be done here is the dismantling of both the FCC and the Universal Fund. This rat hole where billions upon billions each year are fed is mismanaged and ill conceived. Has anyone ever seen an accounting statement of how this money is spent? Why should we be subsidizing phone service in rural areas? Why should we be paying for phone service in libraries? Get that money from local taxes and not from someone's wallet in another state.
The FCC is largely a disgrace. An assuming, arrogant agency always grasping for more authority and mostly serving large corporate interests at the expense of the average citizen. Look at how these morons even continue to differentiate between "local" and "long distance" calls and therefore how each should be separately regulated. Those quaint and artificial distinctions should be abandoned in the new reality of current telecommunications. Another example of clinging to the past is the different regulations for cable vs. telecommunication companies. These corporations offer convergent services and should be regulated in a similar manner.
Posted by zanzzz (138 comments )
Reply Link Flag
Universal Slush Fund
Who decides how the money received from the USF is spent? Whether one area's plight is more dire than another's? I don't mind paying taxes on services, but I should have a voice as to where the money goes and ALL long-distance service companies should be taxed at the same rate. This is a cleverely disguised arbitrary taxation ploy used to fund social programs indiscriminately and should be stopped!
Posted by crocodilosc (2 comments )
Reply Link Flag
Universal Slush Fund
Who decides how the money received from the USF is spent? Whether one area's plight is more dire than another's? I don't mind paying taxes on services, but I should have a voice as to where the money goes and ALL long-distance service companies should be taxed at the same rate. This is a cleverely disguised arbitrary taxation ploy used to fund social programs indiscriminately and should be stopped!
Posted by crocodilosc (2 comments )
Reply Link Flag
VoIP should pay into the USF
I believe it is fair to require VoIP providers to pay the same share of their long distance revenues that cell phone providers and landline long distance providers do.

However, I believe charging them more, or additional fees that cell phone providers do not have to pay, is unfair.

I don't believe broadband access should be subjected to the tax because the tax is specifically meant for phones. That would also amount to a double-charge for consumers who use, say, Vonage --- pay into the USF once to get onto the 'net, pay a second time to use Vonage.

I believe the principle of "you can't be double taxed for something" should apply and keep some sanity to the proceedings.
Posted by bluemist9999 (1020 comments )
Reply Link Flag
VoIP should pay into the USF
I believe it is fair to require VoIP providers to pay the same share of their long distance revenues that cell phone providers and landline long distance providers do.

However, I believe charging them more, or additional fees that cell phone providers do not have to pay, is unfair.

I don't believe broadband access should be subjected to the tax because the tax is specifically meant for phones. That would also amount to a double-charge for consumers who use, say, Vonage --- pay into the USF once to get onto the 'net, pay a second time to use Vonage.

I believe the principle of "you can't be double taxed for something" should apply and keep some sanity to the proceedings.
Posted by bluemist9999 (1020 comments )
Reply Link Flag
 

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