Should VoIP be taxed?

• Author: Nemeth, John
• Position: Voice-over Internet protocol

Voice-over Internet protocol (VoIP) is a technology that allows a user to make a telephone call over a broadband Internet connection, instead of a telephone line. This technological twist on the old-fashioned telephone call has allowed VoIP providers to avoid a plethora of regulations and taxes at both the Federal and state levels. However, the time may have come for the g authorities to ring VoIP's bell.

What Is VoIP?

Generally, VoIP software converts a voice signal at one end of the line into digital data packets (which are carried over a broadband Internet connection) and then converts them back into a voice signal at the other end. Most VoIP providers allow users to place calls to any standard phone number worldwide and offer more features than traditional phone service, at lower cost.

Regulatory Control

States such as Minnesota have tried to assert that VoIP is subject to the same public utility regulations as traditional phone service. However, in a recent ruling, the Federal Communications Commission (FCC) declared that VoIP is not so subject; see In the Matter of Vonage Holdings Corporation Petition for Declaratory Ruling Concerning an Order of the Minnesota Public Utilities Commission (FCC 04-267 (2004)). The FCC reasoned that because the VoIP provider had no means of directly or indirectly identifying the subscriber's geographic location, VoIP could not be separated into interstate and intrastate communications; thus, Minnesota's regulations would likely interfere with interstate communications.

In line with this ruling, legislation proposed in both the House and Senate would have limited the regulatory power over VoIP strictly to the Federal government; see the VOIP Regulatory Freedom Act of 2004, HR 4129 and S 2281, 108th Cong., 2d Sess. (2004). The Senate version, unlike the House version, would also have allowed for state taxation of VoIP. Currently, neither bill has been reintroduced.

Although the FCC's action displays its power to preempt state regulations that thwart or impede Federal authority over interstate communications, it still leaves unanswered the question of state taxation of VoIP.

State Taxation

Historically, the Internet has been off limits to state taxation. The fear has been that the cost of taxation would impede new technological advancements and reduce the number of users who could afford Internet access. In 1998, Congress passed the Internet Tax Freedom Act (ITFA) (P.L. 105-277), which imposed a three-year...