New taxes could slam Net phone users

If the feds get their way, anyone with a phone number would have to pay into a fund to subsidize rural telecom services.

A new proposal to federal regulators has once again raised the possibility of new taxes being levied on Internet phone users.

Buried in a 27-page public notice (click for PDF) released last week by the Federal Communications Commission's federal-state joint board on universal service is a call to force more companies to pay taxes into the Universal Service Fund.

"It is imperative that...all carriers that utilize the public switched telephone network are required to contribute to the USF as soon as possible," Robert Nelson, a now-retired Michigan Public Service commissioner, wrote in his proposal. "The dramatic decrease in traditional long-distance wireline traffic and the increase in the use of VoIP and the deployment of IP networks has changed the dynamics of USF so irrevocably that immediate attention to the issue is required."

That would effectively mean new taxes on customers of Net telephone companies that don't currently pay into the USF. Companies that already pay into the fund indirectly may have to raise their rates because their contribution would likely have to increase, Nelson said in a phone interview Tuesday.

Internet-based chat programs and utilities that do not link up with the public telephone network--such as voice-enabled instant-messaging programs--would continue to be exempt from USF taxes, according to his proposal.

The USF, which is used to subsidize services in rural and high-cost areas, is currently funded by a fixed percentage of revenues from long-distance, wireless, pay phone and telephone services. The companies generally pass on those costs to their customers, often in the form of extra charges stuck onto the end of phone bills.

FCC Chairman Kevin Martin has said that any new regulations should require anyone with a phone number to pay into the fund at the same rate, regardless of whether their phone service comes from a cable provider, VoIP provider, or a wireless or wireline provider.

"We should place all broadband providers on equal footing so that they can fairly compete in the marketplace," he said in statement (click for PDF) before a late-July meeting of the National Association of Regulatory Utility Commissioners.

Some VoIP customers already see charges linked to the USF on their bills, because many providers have to pay fees to the telephone companies whose wires they use. Vonage, for instance, imposes what it calls a "regulatory recovery fee" of $1.50 on each phone number it distributes. Such fees are "very common" among large VoIP companies, said Jim Kohlenberger, executive director of the Voice on the Net Coalition.

But, thanks to murky regulations, "not all of the VoIP companies are yet paying into the universal service fund, because it's not clear that they have to," said Jim Smith, a telecommunications attorney in Washington, D.C. "And so they're not doing it yet, and they're hoping the FCC won't come back and say, 'This is retroactive, and here's your bill for the last two years.'"

The FCC has not yet made any official moves to change the USF regulations, though it is now accepting comments on the four recent proposals.

Congress could also play an important role. Earlier this summer, a group of rural members of the U.S. House of Representatives charged that the base of USF contributors should include "all providers of two-way communications, regardless of technology used, to ensure competitive neutrality."

That issue is likely to be raised again when federal lawmakers are beginning the process of rewriting the Telecommunications Act of 1996, which gave the FCC the power to create the fund but did not account for the monumental role the Internet would ultimately play.

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