States Fearful of Losing Revenues on State-of-the-Art Telephony

Landline phone use is down; wireless usage is up. The Federal Communications Commission’s low-reg stance on new communications technologies has been a fixture for the last several years, following the theory that limiting regulation of new technology will encourage innovation. Voice over Internet Protocol/VoIP technology, which allows users to make phone calls over the Internet, is one of the unregulated new technologies that grew up in the 1990s. As VoIP has become more sophisticated and more stable, providers have begun offering service more widely, sometimes at half the cost of regular landline service. What seems to be good news for consumers has states worrying about revenue shortfalls, however, according to this month’s Knowledge at Wharton Newsletter.

Several states, fearful of losing significant tax revenue from the Universal Service fund that is supported by communications and telephone surcharges and usage fees, have begun to try and regulate VoIP. California, Minnesota, New York, and Ohio are among the states trying to regulate VoIP. the Newsletter quotes James B. Ramsay, general counsel for the National Association of Regulatory Utility Commissioners, as saying, “To the extent that these VoIP services terminate on the public switch network and they don’t pay the same rates as other carriers, they are being subsidized by those other carriers. VoIP [customers] are also being subsidized by those who use the traditional phone carriers.”

In an ironic twist, nineteenth century may lend a hand with regulating twenty-first-century technology. At the same time that Congress is considering the VoIP Regulatory Freedom Act of 2004, which would exempt VoIP services from state regulations, the Congressional Joint committee on Taxation has issued a report that envisions the Spanish American War excise tax—originally passed in 1898 to finance that year’s military adventure against Spain—being applied to Internet and data services as early as this year. The excise tax sent $5.8 billion into the coffers in 2003; and the inclusion of such additional technologies as VoIP could increase that amount considerably, especially since it is estimated that VoIP usage will increase to an estimated 18 million users in the next three years, up from one million now.

And as major telecommunications providers roll out their own versions of Internet telephony service, state concerns over dwindling revenue may prove to be all too realistic. Vonage, Comcast, Verizon, SBC, Time Warner, and others either now offer some form of VoIP or soon will.

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