Is State Excise Taxation of VOIP Services on the Horizon?
 
June 21, 2004
 

Freedom from some state and local communications excise taxation soon may no longer be one of the advantages of Voice-Over-Internet-Protocol (VOIP) services. The New York State Public Service Commission (NY-PSC) has just issued a decision classifying Vonage Holdings Corporation, a provider of VOIP services that utilize the public Internet, as a “telephone corporation.” While not a tax decision per se, this decision has tax implications for both service providers and end-users.

The proceeding was initiated by a complaint from a competing certificated telephone company that, among other things, asserted that Vonage should be required to collect from its customers state and local sales taxes and 911 surcharges. Like Vonage in this case, VOIP service providers have frequently taken the position that they provide information services, not telecommunications services. VOIP service providers that obtain capacity from third party carriers often pay excise taxes as an end-user, without obtaining a resale exemption that may be available for the purchase of services on a wholesale basis. The service providers then assert that they need not subsequently collect telecommunications excise taxes from their own customers.

There will be further proceedings in the Vonage case. The NY-PSC, while ordering Vonage to apply for a certificate of public convenience and necessity and file for a tariff, also invited Vonage to seek waivers of applicable regulations, and the NY-PSC will not enforce regulations against Vonage pending actions on the waiver requests. This matter is therefore not finally resolved in New York, but New York is far from alone in giving increasing regulatory attention to VOIP-based services. The Federal Communications Commission and many state public service commissions are now considering the appropriate regulatory classification of VOIP services, so this issue, and its relevance to telecommunications tax assessment, is unlikely to disappear soon.

Whether or not a specific state and local telecommunications tax applies to particular VOIP-based services of course depends on the wording and enforcement of the particular state law. We may expect, however, that many state and local governments will seek to impose telecommunications excise taxes on VOIP-based services. Both service providers and end-users should therefore begin to evaluate the implications of possible regulatory and tax policy changes on eligibility for tax exemptions and on the total prices paid for VOIP-based services.

For more information, e-mail Helen E. Disenhaus at helen.disenhaus@hklaw.com or call toll free, 1-888-688-8500.