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Appeals court ruling upholds Net phone taxes

In split decision, judges OK extension of taxes to VoIP but agree with some arguments about the rules being unfair.
Written by Anne Broache, Contributor
A federal appeals court on Friday largely upheld a requirement that Internet phone companies like Vonage pay taxes into a fund to subsidize rural telephone service, but voice over Internet protocol representatives said the ruling isn't all bad.

In what amounts to a split decision (PDF), a three-judge panel of the U.S. Court of Appeals for the District of Columbia said the Federal Communications Commission acted reasonably and within its authority last June when it extended to voice over Internet Protocol (VoIP) providers a new set of taxes. Wireline and wireless carriers already are required to pay 10.9 percent of their long-distance revenues into the so-called Universal Service Fund.

The judges kept in place a key portion of the FCC rules--challenged by Vonage and industry group VON Coalition--that appears to discriminate against VoIP providers in favor of their more politically influential competitors. The rule could require the upstarts to pay a higher percentage of their revenues than wireless and wireline rivals.

Vonage and the VON Coalition never challenged the FCC's authority to require their companies to pay into the fund. Instead, they took issue with the methodology for calculating how much they owed. An attorney for Vonage had argued in court that Internet phone companies are analogous to wireless carriers in the percentage of long-distance calls they carry and should have the option of paying the same "safe harbor" percentage of their revenues.

Left unchanged, the FCC's new rules would have led to $2.12 extra on the average VoIP customer's $30 monthly bill, as opposed to $1.38 for wireline customers and $1.21 for wireless subscribers, according to VON Coalition estimates last summer. That translates to roughly $20.7 million per month, or $249 million per year, collected from VoIP customers, based on 9.8 million interconnected VoIP users tallied as of the end of last year, the VON Coalition estimates.

The court decided Vonage hadn't done enough to prove its similarity to wireless carriers and declined to make any changes. Although that move was disappointing, the court's decision to overturn two other portions of the ruling signal "a growing recognition by the courts that the FCC has in some cases gone too far in applying regulatory obligations to Internet communications...that go beyond what they've done for other types of communications," Jim Kohlenberger, the VON Coalition's executive director, said in a telephone interview Friday.

Specifically, the panel ruled that the FCC couldn't force Internet phone companies alone to get pre-approval for the accuracy of so-called "traffic studies," which companies use to estimate the long-distance phone traffic they carry for the purpose of determining how much they owe to the USF, just because it was displeased with the reliability of studies submitted by wireless carriers. It also decided that the FCC couldn't force Net phone companies to pay USF fees twice--that is, both to the wholesale telephone companies whose lines they lease, and independently as a result of the new rules--for the first two quarters that the rules kicked in.

"We are pleased that the court vacated portions of the FCC's USF order that treated VoIP providers in an inequitable manner, as that was our goal: fair and equitable treatment for all VoIP providers under this interim USF funding regime," Vonage spokeswoman Brooke Schulz said in a statement e-mailed to CNET News.com.

The practical implications of the ruling, however, are less clear. Kohlenberger said the traffic study option could lead to slightly lower fees on consumers bills because Net phone companies will discover that the level of long-distance traffic they carry--and thus the percentage of revenues for which USF payments are required--is lower than the default "safe harbor" percentage set by the FCC.

The FCC's order was designed to bolster the multibillion-dollar Universal Service Fund, which has been plagued by allegations of fraud and abuse. USF is used to subsidize telecommunications and Internet services in rural and high-cost areas, schools, libraries and low-income households.

But federal regulators and some members of Congress have been arguing in recent years that the system, which has been around for more than 70 years, is in need of a sweeping overhaul because of its dependence on dwindling long-distance revenues. Until the FCC released its order last summer, for instance, it was unclear whether VoIP providers that connect to the public-switched telephone network--as opposed to peer-to-peer services like Skype, which are excluded from the requirement--also had to pay into the fund.

The Computer & Communications Industry Association, a Washington-based lobby group, also participated in the case, arguing that the FCC had overstepped its authority in issuing the new rules. FCC Chairman Kevin Martin, on the other hand, praised the appeals court's finding that the agency did not. He said in a statement that the panel "has affirmed the commission's action which ensures that USF contribution obligations are administered in a competitively and technologically neutral manner on all phone providers."

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