FCC to Tax Interconnected VOIP Service Providers

June 21, 2006. The Federal Communications Commission (FCC) adopted, but did not release, a Report and Order and Notice of Proposed Rulemaking. It provides, among other things, that the FCC will tax interconnected voice over internet protocol (VOIP) providers. This expands the entities taxed to pay for the FCC's universal service subsidy program. This item also raises taxes on wireless service provides. However, it does not address the subsidy side of the program.

Also on June 21, but later in the day, the House Commerce Committee's (HCC) Subcommittee on Telecommunications and the Internet held a hearing titled "Universal Service: What Are We Subsidizing and Why? Part 1: The High-Cost Fund".

Rep. Joe Barton (R-TX), the Chairman of the HCC, wrote in his opening statement that "the current system is gameable, it's not fair, it's out-of-date". He cited the example of a posh suburb or Houston, Texas, where homes sell for $250,000 to $1,000,000 that created its own phone cooperative that is "getting huge federal and state subsidies".

Rep. Barton (at right) also wrote that "The growth that has occurred in the high-cost fund is unacceptable, unsustainable and unnecessary."

There is, however, considerably more enthusiasm for universal service taxes and subsidies at the Senate Commerce Committee (SCC) and the FCC.

The FCC issued a short release [PDF] that describes this item, and each of the Commissioners wrote a statement.

This release states that the order portion of this item "expands the base of USF contributions by extending universal service contribution obligations to providers of interconnected voice over Internet Protocol, or VoIP, service. For interconnected VoIP providers, the Commission establishes a safe harbor percentage of interstate revenue at 64.9 percent of total VoIP service revenue. Interconnected VoIP providers also may calculate their interstate revenues based on their actual revenues or by using traffic studies."

This release also states that the order portion of this item "raises the existing wireless ``safe harbor´´ percentage used to estimate interstate revenue from 28.5 percent to 37.1 percent of total end-user telecommunications revenue to better reflect growing demand for wireless services. This interim wireless safe harbor was last updated in 2002. Wireless carriers continue to retain the option to base contributions on their actual revenues or on traffic studies that estimate their actual interstate revenues."

The FCC's release reveals little about the NPRM portion of this item. It merely states that it requests comments "on interim contribution obligations imposed in this Order".

The FCC's release does not contain any analysis of the statutory basis for the order. However, see 47 U.S.C. § 254.

This item is FCC 06-94 in Docket Nos. 06-122, 04-36, 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 98-170.

FCC Chairman Kevin Martin (at left) wrote in a statement [PDF] that "consumers are increasingly using interconnected VoIP services as a substitute for traditional wireline service. And, many of these VoIP providers claim that their services are “inherently interstate.” Thus, we could require these providers to pay based on 100% percent of their revenues. Instead, we only require them to contribute based on a safe harbor of 64.9% - the percentage of interstate revenues reported by wireline toll providers. Similar to the options available to wireless providers, interconnected VoIP providers may choose instead to contribute based on their actual interstate revenues or use a traffic study as proxy for these revenues."

FCC Commissioner Robert McDowell wrote in his statement [PDF] that "this system is in dire need of comprehensive reform. Today's action is simply an interim measure that will help bridge the gap between the deteriorating status quo and a fairer and more sustainable system for the future."

FCC Commissioner Deborah Tate joined in this item, as she has other recent items regulating VOIP services. She asserted in her statement [PDF] that she still advocates "a light regulatory touch".

FCC Commissioners Michael Copps and Jonathan Adelstein both addressed the FCC's August 5, 2005, order, and exclusive of broadband service providers from universal service taxation. See, stories titled "FCC Classifies DSL as Information Service" and "Reaction to the FCC's Classification of DSL" in TLJ Daily E-Mail Alert No. 1,190, Monday, August 8, 2005.

Copps wrote in his statement [PDF] that "Today's actions need to be understood in a broader context, because universal service needs to be seen whole. Last August the Commission put in motion a process to exempt DSL from contributing to the support of universal service. There were other options available to us that would have been more in keeping, I believe, with Section 254 of the Communications Act which charges the Commission with implementing policies that promote the ``preservation and advancement of universal service.´´ And more in keeping, I would add, with Section 706 of the Telecommunications Act which charges the FCC to encourage the deployment of advanced telecommunications capability to all Americans."

Copps continued that "DSL and cable broadband -- which are surely going to be the backbone of our nation’s telecom infrastructure for years to come -- can build where they choose and profit as they can without contributing towards making these services available to harder-to-reach people. It’s like taking the broadband out of a broadband strategy -- except that the country lacks such a strategy."

Adelstein wrote in his statement [PDF] that "Last August, the Commission embarked on an uncharted path by reclassifying broadband Internet access services as information services, outside the framework of our traditional Title II authority. Nowhere is this path more murky than in the case of universal service, where reclassifying these services removes their revenues from the mandatory contribution requirements of section 254.

He continued that "exempting broadband Internet access revenues would remove a sizable and rapidly-growing segment of the telecommunications sector from the contribution base. That Congress contemplated that our universal service mechanisms would evolve as technology evolves is certainly evidenced in the broad permissive authority it gave the Commission to expand the contribution base. As I said at the time of the reclassification, I would have preferred to exercise our permissive contribution authority to address this potential decline in the contribution base permanently."

Reaction to FCC Order. Rep. John Dingell (D-MI) commented upon this item in his opening statement at the HCC hearing on June 21. He said that "All companies who offer telephone services, whether over the Internet or through a traditional network, should carry the same obligation to support universal service. The FCC took an interim step this morning to broaden the base by requiring VOIP providers to pay and raising the safe harbor for wireless carriers. But, let me be clear, even with debate over the proper percentages, the FCC only did the easy part. The true test will be whether the FCC can muster the will to resolve difficult questions among industry participants who have benefitted handsomely -- and do so without finding consumers' pockets easy prey."

BellSouth's Herschel Abbott praised this item. He wrote in a release that "This order ensures that all telecom providers pay their fair share of universal service support, stabilizing the fund while the Commission considers comprehensive reform of the way contributions are calculated. It is certainly fair for consumers that VoIP providers to contribute to this vital fund. We urge the Commission to adopt a technologically neutral numbers-based approach as an equitable permanent solution".

Walter McCormick, head of the USTA, stated in a release that "Today's action is a good interim step by the Commission as it begins to reform comprehensively the nation's intercarrier compensation regime. This decision acknowledges the tremendous changes in how American consumers communicate while also honoring the nation’s commitment to universal service. We applaud today's ruling for ensuring that all voice service providers are treated alike and will continue to work closely with the Commission as it moves forward to revise the entire intercarrier compensation system, including stabilizing and strengthening the universal service system."