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04:55 PM

VoIP Faces Regulatory And Tax Questions

Proposed legislation and an IRS inquiry could affect the future of the voice service

The battle over the future of IP-based voice communications is being waged in Washington, D.C., as federal watchdogs debate how--and whether--to regulate and tax the technology. Key issues: Should taxes on regular phone services be extended to new communications services such as IP telephony? And who should oversee the services, federal or state regulators? The answers could affect the growth and adoption of what is a fast-growing technology.

Proposed legislation aims to address the regulatory question. Reps. Rick Boucher, D-Va., and Cliff Stearns, R-Fla., last week introduced the Advanced Internet Communications Services Act, which would treat voice-over-IP services as a new class of telecommunications service and put it solidly under federal auspices, regulated by the Federal Communications Commission.

"Everybody is still sort of struggling with the idea of how IP telephony should be handled," says Burton Group analyst David Passmore. Rules and regulations that govern the telephone industry have worked for decades, "but now don't seem to be relevant [for VoIP] because technology has marched on."

ChartSo far, VoIP services have been mostly left alone by regulators. But as the number of subscribers surges--some sources estimate that as many as a third of U.S. households could be making IP calls by 2007--legislators are increasingly concerned with the issue.

Billions of dollars are at stake. Conventional phone calls are subjected to a barrage of fees and taxes; Voice-over-IP calls have been treated as a data service and remain untaxed. That's good news for VoIP providers and customers, as it keeps costs low. But it's bad news for competitors such as local phone companies, which are placed at a disadvantage because they have to pay taxes that VoIP rivals don't. It's also bad for states, which could lose large amounts of tax revenue if substantial numbers of consumers switch to voice over IP.

"If IP telephony really takes hold, fewer and fewer people are going to be paying phone bills, and that tax revenue dries up," Passmore says. "And it's a huge amount of money."

Other bills also are under consideration. HR-4129, The Voice Regulatory Freedom Act of 2004, sponsored by Rep. Chip Pickering, R-Miss., would make VoIP a federal matter. Its companion bill in the Senate, SB-2281, is sponsored by Sen. John Sununu, R-N.H.

Business users say they're against government regulation. In an InformationWeek survey of 300 business-technology executives conducted in February, 68% of respond- ents said voice over IP should not be regulated. Among the 32% who favored regulation, 90% of them said the FCC should be given jurisdiction. Only 6% said states should have regulatory authority over VoIP.

Congress isn't the only federal body eyeing IP telephony. Last week, the Treasury Department and the Internal Revenue Service issued a request for information on the topic, which some view as the first step in extending current phone taxes to VoIP calls. However, a Treasury spokeswoman said the agencies need more current information on the industry and modern technology before making changes to regulations that are more than 40 years old.

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