FCC Declares That States May Tax Intrastate Revenues of Nomadic Interconnected VOIP Providers

November 5, 2010. The Federal Communications Commission (FCC) released a Declaratory Ruling (DR) [12 pages in PDF] in which it held that going forward states may impose universal service taxes on the intrastate revenues of nomadic interconnected voice over internet protocol (VOIP) service providers.

The FCC acted upon a petition for declaratory ruling filed by the states of Nebraska and Kansas in June of 2009, and amended in September of 2010.

The FCC concluded that "we should not preempt the imposition of such requirements on nomadic interconnected VoIP providers so long as (1) the relevant state's contribution rules are consistent with the Commission's universal service contribution rules and (2) the state does not apply its contribution rules to intrastate interconnected VoIP revenues that are attributable to services provided in another state."

The FCC rejected arguments advanced by the Voice on the Net Coalition and Google. It wrote that "We disagree with commenters who argue that state universal service contribution requirements must be preempted to prevent frustration of the federal policies of encouraging the development of IP-based services and promoting the deployment of broadband infrastructure." (Footnote omitted.)

The FCC in 2006 decided that it could tax interconnected VOIP to subsidize its own outdated, and waste, fraud and abuse plagued, universal service programs. This DR now allows states to do the same.

Early in this millennium there was substantial support at the FCC for leaving new and innovative information and IP based services unburdened by the legacy regulatory regimes that were then applied only to communications carriers.

Those days are gone. The present DR represents one more in a long series of steps towards extending old regulatory regimes to new technologies.

FCC's 2004 Vonage VOIP Order. In November 2004 the FCC adopted a Memorandum Opinion and Order [41 pages in PDF] that addressed Vonage Holdings Corporation's Petition for Declaratory Ruling regarding its VOIP service in the state of Minnesota. The FCC found that Vonage's VOIP service is an interstate service, and that Minnesota cannot regulate as it had proposed in a September 2003 order.

The FCC refers to this as the "Vonage Preemption Order".

This MO&O is FCC 04-267 in WC Docket No. 03-211. See also, stories titled "FCC Adopts Order on Vonage's VOIP Petition" in TLJ Daily E-Mail Alert No. 1,015, November 10, 2004, and "FCC Releases Vonage VOIP Order" in TLJ Daily E-Mail Alert No. 1,018, November 15, 2004.

The U.S. Court of Appeals (8thCir) upheld the FCC's order in its March 21, 2007 opinion [22 pages in PDF] in Minnesota v. FCC. See, story titled "8th Circuit Denies Petitions for Review of FCC's Vonage VOIP Order" in TLJ Daily E-Mail Alert No. 1,555, March 21, 2007.

That case is Minnesota Public Utilities Commission v. FCC, and consolidated cases, U.S. Court of Appeals for the 8th Circuit, App. Ct. Nos. 05-1069, 05-1122, 05-3114, and 05-3118, petitions for review of a final order of the FCC.

The just released FCC DR asserts that "nothing in this Declaratory Ruling affects our conclusion in the Vonage Preemption Order concerning preemption of rate regulation, tariffing, or other requirements that operate as ``conditions to entry. Nor should this order be construed as interpreting or determining the scope of the Vonage Preemption Order." (Footnote omitted.)

FCC's 2006 64.9% Rule. In June of 2006 the FCC adopted a Report and Order [151 pages in PDF] that requires interconnected VOIP providers to pay federal universal service taxes on interstate revenue. This R&O also arbitrarily set interstate revenue at 64.9% of total VOIP service revenue.

The FCC refers to this R&O as the "Interim Contribution Methodology Order".

This R&O is FCC 06-94 in in Docket Nos. 06-122, 04-36, 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 98-170. See also, story titled "FCC to Tax Interconnected VOIP Service Providers" in TLJ Daily E-Mail Alert No. 1,397, June 22, 2006, and story titled "FCC Releases Order and NPRM Regarding VOIP and Universal Service Taxes" in TLJ Daily E-Mail Alert No. 1,403, June 29, 2006.

Vonage v. Nebraska PSC. On May 6, 2009, the The U.S. Court of Appeals (8thCir) issued its opinion [10 pages in PDF] in Vonage v. Nebraska Public Service Commission, affirming the judgment of the District Court, which enjoined enforcement of a Nebraska state tax on nomadic interconnected VOIP.

The Court of Appeals wrote that "A reasonable interpretation of this language is the FCC has determined, given the impossibility of distinguishing between interstate and intrastate nomadic interconnected VoIP usage, it must have sole regulatory control. Thus, while a universal service fund surcharge could be assessed for intrastate VoIP services, the FCC has made clear it, and not state commissions, has the responsibility to decide if such regulations will be applied."

See, story titled "8th Circuit Affirms Injunction of Nebraska VOIP Tax" in TLJ Daily E-Mail Alert No. 1,935, May 6, 2009.

That case is Vonage Holding Corp. and Vonage Network, Inc. v. Nebraska Public Service Commission, et al., U.S. Court of Appeals for the 8th Circuit, App. Ct. No. 08-1764, an appeal from the U.S. District Court for the District of Nebraska

Following that court opinion, Nebraska, along with Kansas, filed a petition for declaratory ruling with the FCC.

The National Association of Regulatory Utility Commissioners (NARUC), which represents Nebraska's, Kansas's, and other state's telecom regulators praised the just released DR.

NARUC President David Coen stated in a release that "This decision is right on the law and right for consumers. It assures, as Congress intended, that nomadic Voice-over-Internet Protocol providers join other carriers supporting critical State universal service programs. This is a significant decision and we applaud the FCC for moving forward."

Nebraska Public Service Commission (NPSC) Commissioner Frank Landis stated that "This decision will have a tremendous impact on the future of quality phone and broadband service in Nebraska ... It's simply a matter of fairness".

The FCC adopted this item on October 28, 2010, but did not release it until November 5, 2010. It is FCC 10-185 in WC Docket No. 06-122.