Federal appeals court weighs Internet phone taxes

Some members of the three-judge panel at the U.S. District of Columbia Circuit Court suggested the Federal Communications Commission had not fully justified certain requirements it imposed in an order last June. The panel appeared less swayed, however, by arguments that the FCC had overstepped its authority in setting the mandate.

At issue is a unanimous FCC decision to require all voice over Internet Protocol (VoIP) services that connect to the public-switched telephone network--as opposed to using peer-to-peer technology, such as Skype--to contribute a percentage of their long-distance revenues to the Universal Service Fund. The multibillion dollar pool of money subsidizes telephone service in rural and low-income areas, certain health care providers, and schools and libraries. Previously, specific contribution requirements existed only for wireless and wireline telephone carriers, leaving it less clear where VoIP fit in.

If the FCC's rules are upheld, Americans could continue to see taxes levied on their VoIP bills--and at a steeper rate than on their cell phone or wireline bills. That's a situation the relatively young VoIP industry fears will drive away business.

Leading VoIP provider Vonage challenged the order, arguing that it discriminated in multiple ways against Net phone companies. When the FCC proceedings were unfolding, an Internet phone industry group argued that the new rules would lead 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. (Companies typically pass on their contribution fees to their customers.)

The FCC said it made that decision because the fund hinges on long-distance revenues, and it believed VoIP markets itself as carrying more long-distance calls than rival services.

Christopher Wright, an attorney for Vonage, told the judges his client was not opposed to contributing to the fund. Rather, the company believes it should have the option of paying a rate more comparable with those required of cell phone companies.

"It's simply not reasonable to think that a company that offers local and long-distance is analogous to a company that only offers long-distance," he told the judges.

Two of the judges took issue with that argument. Judge Merrick Garland suggested he didn't believe the contribution rate for VoIP services should be viewed in the same way as wireless services because, in his view, a larger percentage of cell phone calls are local. Judge David Tatel called VoIP a "completely different kind of service" than wireless.

The Computer and Communications Industry Association, which backed Vonage in the proceedings, went further than the Net phone company, arguing that the FCC had no authority to require such payments from VoIP services in the first place. Under federal law, only telecommunications services are supposed to contribute to the fund, and the FCC has not yet ruled whether Internet phone companies fall into that category, argued attorney Glenn Manishin.

Those assertions incited sharp questioning from some of the judges. "What language in the statute supports that?" Judge David Tatel asked.

But Judge Harry Edwards later pressed FCC attorney James Carr to spell out the agency's legal defense for extending the requirements to VoIP services. "You have a track record today of arguing, resting on nothing," he said.

Edwards was the same judge who called the FCC's arguments "gobbledygook" and went on to dissent last year when the rest of his panel upheld federal rules extending wiretapping requirements to Internet providers.

The panel also grilled Carr on two sections of the FCC's order (PDF) that Vonage held were unfair. One portion that attracted particular attention requires VoIP providers not only to pay directly into the Universal Service Fund but also, for the next two quarters, to continue paying any USF-related fees requested of them by the telephone companies whose wires they lease. Some telephone companies have long collected such fees from VoIP firms that use their facilities, and those fees already show up on some VoIP bills, including Vonage's.

The FCC argued the temporary requirement is designed to make up for any shortfalls that might occur when telephone companies no longer have to collect those fees. But Vonage and its supporters argued it amounts to double payment.

Judge Garland pushed Carr to defend the move. "The only rationale given in the rule is we need more money, so let's take it from them," he said.

"It seems unreasonable," Judge Edwards added.

The case came before the panel as both the FCC and Congress continue to ponder even more sweeping changes to the contribution structure of the fund. They argue that the era of all-inclusive cell phone plans has eroded long-distance revenues--and thus the size of the fund--and could shortchange zones in need of financial help. Some have even called for expanding the system to tax and finance broadband connections.

After more than an hour of oral arguments, the panel took the case under advisement. A decision is expected in a few months.