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Vonage Beats Off Nebraska's Attempt To Tax VoIP Service

Congress initially exempted VoIP service from state taxation because it wanted to encourage the development of the Web.

The latest attempt to level state taxes on VoIP service has failed after the 8th U.S. Circuit Court of Appeals turned down an appeal by the Nebraska Public Service Commission to compel Vonage users to pay taxes on their service.

Since the beginning of Vonage's VoIP service early in the decade, several states have sought to force Vonage and other VoIP suppliers, as well as their customers, to pay taxes to states' Universal Service Fund. However, the taxing attempts have been beaten down, with nearly all of them citing a 2003 landmark ruling by federal Judge Michael Davis of Minnesota.

"We welcome the 8th Circuit's decision, which marks the sixth time a federal court has stopped attempts to regulate Vonage's Internet telephone services at the state level," a Vonage spokesman said in a statement.

Several states have argued individually that they are seeking to follow their own state regulations and are not necessarily bound by the federal decision in Minnesota, which argued that the U.S. Congress wanted federal regulations to take precedent over state laws. Some states have never sought to tax VoIP services.

The decisions have all swung on whether VoIP service is viewed as an information service or as a telecommunications service. VoIP providers argue that their service, which flows over the Internet, is an information service and therefore can't be taxed. Congress had initially exempted VoIP service from state taxation because it wanted to encourage the development of the Web.

In his earlier ruling, Judge Davis said, "Congress has expressed a clear intent to leave the Internet free from undue regulation so that this growth and exploration may continue. Congress also differentiated between 'telecommunication services,' which may be regulated, and 'information services,' which, like the Internet, may not."

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