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« Telephony and Music: More than just an "On-Hold" Relationship | Main | Consumer VoIP Story from The Florida Times-Union »

December 23, 2004

Municipal and State Governments to VoIP Industry: "Deploy VoIP ... but Give Us All your Money" -- Zen Koan or Catch 22?

A Wall Street Journal editorial yesterday (12/22) shined the spotlight on those politicians and policymakers who have been sending mixed messages lately to the VoIP industry. These politicians have been saying on the one hand that consumers should be allowed to avail themselves of the benefits of IP technology, and, at the same time, they have been threatening to extract usurious fees from VoIP service providers. These mixed signals have made it difficult for us would-be innovators and entrepreneurs to know whether or not to deliver IP-based technologies and services to American consumers. Every legislator, governor, and regulator allegedly wants to promote, and allow its constituents to benefit from, new IP-based technologies and services. At the same time, many politicians see VoIP as an easy revenue generator and have blood in their eye for the nascent VoIP industry.

Recent FCC and Congressional action indicates a general desire to ensure that the VoIP innovators may continue to bring new technologies and services to consumers with some assurance that government will not stifle its growth through unnecessary fees, taxes, or administrative hassles. Most recently, the FCC indicated that VoIP services must not be subjected to 50 state and countless local rules that would make it impossible for any would-be VoIP provider to deploy a national or global product.

Within the past two weeks, however, we have heard rumblings from both state and local authorities that they intend to extract as much blood as possible from the nascent industry. The WSJ properly noted recent efforts by the National Governors Association and by some in Congress who would attempt to impose taxes upwards of 20% on VoIP services.

The WSJ editorial did not take note of similar efforts by municipalities, such as Santa Monica, to impose a utility use tax on VoIP services. At least the city of Santa Monica had the nerve to confront the industry directly without having to hide behind a mob of municipalities.

Unlike Santa Monica, members of the National Governors Association are attempting to shield themselves within the mob. No individual governor could be accused of thwarting VoIP if all the other governors endorse a nationwide effort. I guess no one wants to be the only governor imposing usurious fees on new IP-based technologies and services. Instead, the governors have joined forces in the hope that if everyone imposes similar fees, they do not individually take the heat for being the only tax-imposing luddite driving away the VoIP industry.

If it were only Santa Monica imposing a municipal tax, the VoIP providers could simply take their services elsewhere and the only losers would be the Santa Monica consumers who might not benefit from the promise of IP-based communications. If every state imposes a similar tax, so the logic goes, no haven would exist for tax-dodging VoIP providers. This logic fails to recognize that VoIP is a global phenomenon. The municipalities, states, and countries that embrace the new technology and foster the growth of IP communications will become havens for IP communications entrepreneurs and allow their residents to avail themselves of the benefits of IP communications. The municipalities, states, and countries that choose to impose unnecessary burdens on IP communications will find that they have become pariahs to the would-be entrepreneurs who will take their business, money and ideas to more inviting locations. The residents of those backward looking governments will become disenfranchised wallflowers at the communications revolution.

As revealed by the WSJ editorial, what seems most disturbing about the National Governors Association's recent push is that it is spearheaded by Gov. Mark Warner of Virginia. Those of us from high tech/telecom backgrounds recognized Gov. Warner as a former champion of new technology and believed his goal was to create a haven for new technology within Virginia. Gov. Warner, of all government officials, should know better. As a former leader of the Virginia high tech and telecom explosion in the nineties, Gov. Warner knows the fragile nature of new technology and what it takes to nurture it. This certainly cannot be the same Mark Warner who wanted to make Virginia a hub of new technology and innovation.

IP-based communications has the power to transform the way we live and work. In order to realize this potential, it is essential for the policymakers to lead the way and ensure that government does no harm and ensure the growth and viability of IP-based communications. Imposing taxes equivalent or greater than the taxes imposed on such "sins" as alcohol, tobacco, and firearms does not seem to be the best way to encourage deployment of a new technology. Since when did communication innovation become a sin?

Posted by jeff on December 23, 2004 12:17 AM | Permalink

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I agree with not taxing VOIP at all. We are in the process of deploying a unique implementation of VOIP, and as of now, one thing that lingers unsolved is whether or not this will be taxed. If it will, I am honestly considering relocating this to another country. So much talk about outsourcing, huh? I think we should pressure the govt. to let the US remain the home to innovation. Taxing this relatively new area of technology will force many would-be innovators out of the US.

Posted by: chuks at February 6, 2005 06:31 PM

Sorry Rob and Dan, The point is not that the government is entitled to revenue to fund important programs.

The point is:
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- What about instant messages?
- Want to tax browser sessions also?

Please pause a moment and likely you will realize that none of this makes any sense. Demanding complicated and useless infrastructural changes which make no sense DOES stifle innovation. One can not tax on the application level, sorry.

If you are so desperate to create new taxes then perhaps give access some thought.

The reality is that the free market as it is emerging today will do a superior job in delivering service to all corners of the country/world. The USF no longer makes any sense, nor does the argument for science funding above.

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Every time I read comments like those by "Dan", I wonder where people ever got the notion that it should just be accepted that people should be taxed for their right to communicate? You would think that, in a land that supposedly values freedom of speech, that communications would be one of the last things that should be taxed, yet many politicians look at it as one of the first.

To say that because traditional phone service is taxed, VoIP ought to be also is kind of like if someone in the 1850's had made the argument that it's wrong to enslave only black people, therefore we should enslave those of other races also. Just because one industry is saddled with a bad tax doesn't mean that to be fair, you apply the bad tax to other, somewhat similar industries. The better solution is to eliminate the bad tax. The taxation of telephone service is a regressive tax, in that it hits those of lower income levels harder than the rich, but also I doubt you'd find one person in a hundered (politicians not included) that would not vote to have taxes removed from phone bills.

The problem you have with VoIP is that it can be provided from an offshore location. Wait until some Carribbean island nation figures out that it can cut a deal with VoIP providers in exchange for them doing service from there. Even Canada might decide to forego taxation of VoIP in order to attract providers there (I know that's a stretch given that Canada seems to like taxing its citizens as much as the U.S. does, but then again, keep in mind that broadband service in Canada costs about half of what it does in the U.S.). Unless the U.S. wants to become like China and try to cut off all "unauthorized" communications from outside the country, there is a very real possibility that excessive taxation could drive VoIP from our shores.

Finally, while I suppose there are people who buy into the line that all these taxes are really needed to support valid functions of government, there are probably just as many people (if not more) that are of the opinion that many of the taxes and fees we pay are just the government picking our pockets to support fat cat politicians and their politically-connected friends. For example, the "universal service fund" on most telephone bills is a joke; most of those funds go to second- and third-tier phone companies which are considered some of the most profitable companies in the nation (many of them have higher ratings than the traditional baby Bells). Well, sure, any company can be highly profitable if you can get the government to rob the ratepayers served by other companies and give the money to you (and to think, you only have to give a few thousand to your congresscritter's re-election fund - chump change compared to what you get). And meanwhile, there are still areas in the less densely populated sections of some states that don't have phone service.

If the ILEC's think it's so unfair that VoIP (which IS fundamentally different from traditional wireline service) isn't taxed at the same rate as wireline, then why don't they try to influence their customers to write to Washington and their state capitals to have those taxes repealed? For that matter they could set up a web page that people could go to and enter their messages of opposition to the excessive taxation and the fees on their phone bills. But what you have here is a "you grease my palm and I'll grease yours" relationship with the politicians, and the only people who get screwed are the ratepayers/taxpayers.

Posted by: Jack at December 23, 2004 01:04 PM

Gov Warner cannot even FIGURE OUT ''outsourcing''' the archaic Liquor State Run Stores and making liquour just another TAXED ITEM to benefit from.........HOW do you expect him to figure out VOIP?????????

Skibare

Posted by: skibare at December 23, 2004 11:05 AM

Taxing VoIP Might Not Hurt After All.

In your posting regarding not taxing of VoIP and all things IP you neglect to recognize these taxes you claim threaten IP innovations are the very taxes that help fund the University Grants for research that created the Internet. Oh if life were as simple as certain folks with immediately vested interest think when their pocket books are involved.

When one moves from the radical VoIP innovator role to the vested IP communications corporate board member ones views do evolve. To see one who fought the mainstream corporate conglomerates over seeing VoIP as a poor man's free voice service to one who fights for all the profits a VoIP company can hold on to is a long jump. Have we also moved from Hawaiian shirts to corporate suits?

Still further, remember not all Cities in these United States are equal or equally served by the Broadband world in which you live. Just as not all parts of the United States had equal access to electric power in the early 1900s and "Big Bad Government" stepped in with Taxes to create the REA and Municipal Utility Companies. "Big Bad" Municipalities and States will have to create Taxes or their own Telecommunications companies to provide equal access to fiber based Broadband and future IP Communications innovations.

This is nearly as bad as the RBOC decrying the entry of small and medium sized Municipalities entry the FTTH IP Communications and Entertainment business, while they were begging the Federal Government for Federal subsidies to support their own FTTH build out.

For large and small Human Civilizations to function their needs to be government bodies and hence taxes to support them. Market forces will not support the most cutting edge innovators that do primary research at Federal/State funded Universities like the research done in the 1960/70's leading to the Internet as we know it today.

Sorry for the soap box, but some of us Republicans are realists!
Rob

Posted by: Rob at December 23, 2004 10:18 AM

The Journal's editorial is a stalking-horse for a rather radical political notion that has come to seem mainstream: that there's virtually no justification for any kind of tax. Among the things they're condemning is the effort to adopt simpler rules for treatment of interstate sales, which of course happen to include sales of goods over the Internet. However you feel about such taxes, the principal issue isn't whether innovation is threatened by California getting the opportunity to charge sales tax for a book I buy from an Internet retailer based in Nevada, but whether a new mode of conducting commerce will be used by anti-tax forces to try to screw state and local governments -- *and* their constituents -- that are in fact hurting (the evidence to the contrary in the WSJ editorial is both scant and ephemeral).

As to taxing VoIP specifically, well, yes, we ought to look at the impact of charging taxes equivalent to current levies on telephone service before they're imposed. But it's hard to buy the alarm that innovation will be stifled simply because consumers are asked to continue to pay something similar to the tax they're already paying on their existing phone service. My guess would be that a tax on VoIP equal to taxes on wireline services would have little or no impact on consumer acceptance. People in Santa Monica will just have to pay a little more for their CallVantage is all -- a recognized cost of living there until the residents vote to change it.

Arguing that IP voice services ought to be exempt from taxes because they're technologically innovative seems a little like saying that states shouldn't charge sales tax on hybrid vehicles or those equipped with the On-Star sytem because they're more sophisticated than standard models. In fact, many states do offer tax credits or similar incentives to people who buy hybrids, but that's driven by a belief that a larger public benefit is gained by encouraging the purchase. As far as I know, if you buy a hybrid, you still have to pay your sales and gas taxes and license fees. In the case of the major VoIP services, the major benefits touted are private -- principally lower costs and enhanced features for consumers and revenue for the providers -- though obviously the market benefits from all the innovations in IP.

Sorry to go on at such length.

Posted by: Dan at December 23, 2004 12:22 AM

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