The Jeff Pulver Blog: The Internet Tax May Be Creeping Up on Us in the Guise of Imposing the Universal Service Fund on Internet-delivered Voice Applications

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June 14, 2006

The Internet Tax May Be Creeping Up on Us in the Guise of Imposing the Universal Service Fund on Internet-delivered Voice Applications

Given the number of questions I have received regarding my recent statements at GLOBALCOMM praising the FCC for moving to impose USF obligations on interconnected VoIP providers, I thought it would be helpful to clarify my comments.

I have repeatedly called for VoIP providers that offer services intended to be nothing more than a replacement for plain old telephone service to step up to the plate and meet the regulatory obligations of traditional telephony providers. In fact, the Voice on the Net Coalition, the voice for the VoIP industry in the US, has also supported meeting the basic economic and regulatory obligations that ensure a robust and ubiquitous public switched network.

For the record, however, I have to reiterate that many, if not all, of the current regulations do not make sense in a world where voice is an application riding on top of broadband transmission services. The current Universal Service Fund ("USF") contribution methodology, which requires service providers to determine whether its revenues are derived from intrastate vs. interstate or international services, telecom services vs. information services, or even customer premises equipment ("CPE"), is one of the many regulatory schemes that no longer work in a geographically irrelevant, converged, IP-enabled world. As the VON Coalition has repeated in many of its filings over the last few days, applying USF assessments on VoIP services that act like replacement phone services is not a matter of if or when, but a question of how. To this end, while I do support the assessment of USF contributions on the companies that the FCC refers to as "interconnected" VoIP providers, first, the FCC must reform the assessment mechanisms so that VoIP consumers are not hit with a discriminatory, inequitable, and arbitrary tax simply because they have chosen to utilize advanced IP technology to make voice calls, as opposed to wireless or circuit switched services. Chairman Martin has called for a new contribution system based on working telephone numbers. This is just one better way of ensuring that the transmission service (or the connection) contributes, rather than the application.

If IP-based services include voice as an application, just one of many rich applications deliverable thanks to IP technology and the Internet, it should not be mired by the legacy regulatory superstructure. By attempting to assess USF contributions on the application rather than the underlying transmission service, the FCC would be moving away from a stable and predictable funding source (i.e. contributions on DSL revenues) towards attempting to quantify and assess the rapidly changing applications that ride over the transmission facilities.

***

So, where do things stand at the moment?

For those of you coming at communications from the historically unregulated Internet and computer space, be aware that the FCC is about to take us further down the path of regulating Internet-based software applications (while it continues to deregulate bottleneck, telecom transmission services).

Rather than engaging in much needed comprehensive USF reform, the FCC is poised to apply the current telecommunications revenue-based Universal Service obligations to interconnected VoIP users. Press reports indicate that at its Meeting on June 21, the FCC is likely to determine that 64.9% of revenues from interconnected VoIP traffic are interstate and therefore subject to universal service contributions. This is more than double the rate currently paid by wireless services (begging the question what is the right rate to apply to IP-based wireless voice applications).

Reports from the FCC are that VoIP users will be required to subsidize the shortfall in USF that will result from the FCC's decision from last August that eliminated the obligation of DSL and other Internet access services to continue making USF contributions. USF. As you might recall, the FCC, last year, reclassified DSL as an information service, which made it (like cable modem service) exempt from having to contribute to the Universal Service Fund. At the time, it was believed that the FCC would have established a longer-term USF contributions in order to offset the estimated $350 million loss of contributions based on DSL revenue. Again, under a contribution methodology that measures connections to the PSTN all providers, including VoIP, would contribute on a technologically neutral, equitable and non-discriminatory basis. However, the FCC's current proposal inordinately taxes users of IP technology.

Let's try to put this in some broader universal service and Internet communications context. Who recalls the FCC Order precluding Interconnected VoIP providers from offering and marketing services to areas where the VoIP provider cannot guarantee E911 service? Isn't it odd that VoIP users are being asked to subsidize millions of, mostly rural, phone lines that are today marketed and sold without E911, while VoIP providers are not allowed to offer rural Americans a VoIP service that includes basic 911 and could cut consumer phone bills -- not by the small amount that universal service supports -- but a decrease in costs of 40 to 60%? So, VoIP providers subsidize traditional telecom services that don't offer E911 under the guise of providing more affordable communications, rather than VoIP providers being enabled to provided even more affordable communications. Whose interest does that serve? Oh right, the rural LECs.

Then there is the legal issue at the heart of this debate over who pays for universal service. And, isn't the move to impose contributions on Internet-based communications providers essentially an Internet "tax". During the debate over the e-rate (universal service funding for schools and libraries), conservatives like FCC Commissioner Harold Furchtgott-Roth(for whom Kevin Martin worked) argued that the e-rate was a "backdoor tax increase by unelected officials." Isn't there something screwy with the fact that the Bush administration has just eliminated the Spanish American War "tax on talking" last week only to replace it with an Internet "tax on talking".

***

I know some of you must, by now, think I am a broken record when I say that "Voice is just and application." But, I think the FCC is still missing the point that "voice" is, well, just an application. The voice application riding on the broadband network is being asked to be the application subject to paying into the Universal Service Fund. Isn't it time that the FCC recognized that it is the access that is the universal good and that American consumers should be allowed to do whatever they want with that access (within the confines of the law). And, if the FCC doesn't see this logic, why hasn't it begun taxing e-mail, text messaging and instant messaging, which have been demonstrated to be the biggest reason for the reduction in long distance revenues and the drop in the USF contribution base?

And now the FCC is poised to impose an outdated, economically irrational charge based on an arbitrary assessment of revenues on applications such as VoIP that run over the transmission layer, while freeing the transmission layer of its universal service contributions. By transforming voice communications into a software application, VoIP can integrate communications and data in entirely new ways. Soon a voice component can be added to any type of device, application or service that uses a microprocessor or touches the Internet. By attempting to impose the revenue-based USF assessment on the application rather than the underlying transmission, the FCC would be moving away from a stable and predictable funding source towards attempting to quantify and assess the rapidly changing applications that ride over the transmission facilities.

The logic of this backwards approach escapes me (unless the goal is to tax the Internet, to stifle IP-based communications, and to relieve the access providers of universal service funding obligations). What is the universal good that America should be working to achieve? In 21st Century America, isn't it about getting ubiquitous broadband, to ensure that all Americans can take full advantage of the digital/broadband/Internet revolution, to transform the ways in which humans communicate and interact? To that end, shouldn't USF be about collecting from pipes to support pipes, not software? Isn't it a better world where American businesses can "insource" jobs to an IP-enabled rural America (e.g., JetBlue call-centers), than to outsource jobs to cheaper labor abroad (e.g., any number of formerly US-based call centers)?

When we met with the FCC last week, the question presented to us was "Is the 64.9% safe harbor too high?" And if less than 65% of VoIP traffic Interstate should the FCC overturn its landmark decision finding that interconnected VoIP services are jurisdictionally interstate? Too me that is a loaded question along the lines of "When did you stop beating your wife." The better analogy is perhaps the old joke that goes: "Will you have sex with a stranger for $1 billion dollars?" If you say yes, than you are designated a prostitute and you are just haggling over the rate. It misses the point to say that X % of VoIP traffic is local or interstate or international. One of the fundamental points of IP-based communications is that geography is irrelevant. Which is precisely what the FCC determined in the Vonage jurisdictional order. It did not, as some have suggested, find that more than 50% of the traffic crosses state or local exchange boundaries (concepts which are anathema in the IP world). What is not irrelevant is the fact that facilities are still within the jurisdiction of local and federal regulators, and the public good is too ensure the deployment of the most robust networks possible and to ensure that the user might maximize the value of that network. To me that means not assessing discriminatory taxes on the Internet-delivered voice application to finance the physical layer. That will only stifle innovation of Internet-delivered applications. Instead, the FCC should take the bold step of finally reforming the way providers contribute to the Universal Service Fund. The fund is being rapidly depleted, through no fault of the VoIP industry, and the FCC should not delay making necessary reforms to ensure support for our nation's networks.

Tags: USF, FCC, VoIP, Jeff Pulver

(c) 2006 Jeff Pulver. All Rights Reserved.
(This blog posting is copyright protected by Jeff Pulver. Portions of this blog posting may be quoted or abstracted if attributed.)

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Posted by jeff on June 14, 2006 06:18 AM | Permalink

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Posted by: taxfaq at January 4, 2007 10:37 AM

Did you by chance ask the FCC where they got this 64.9% number? If it's anything like their past statistical numbers... garbage in - garbage out.

As for USF, if it needs to be kept alive for the sake of keeping some of the pork out of future telcom bills or stalling nomination approvals, then just broaden the tax base at a lower percentage.

Just don't piece meal the tax, find out by audit, yeah actually doing some math and find out what in USF is needed to meet its goal.

Take that number and divide it across the services that are used for telecom and information services.

For an example of Broadband (DSL/Cable), if you take the top BB providers total, using ISP-Planets numbers, we have about 40.37 million or so. Adding cable into the USF would be helpful.

The 2006 USF est support budget is $7.3, per their website - http://www.universalservice.org/.

Now take take 40.37 x .50¢ (cents)per month = $20.185M x 12 = 2.4B of which is aprox 33% of the USF budget.

Now take the same across all forms of telecom and Information services and it would be a greater amount of funds generated by more resources and lower the cost burden on specific services.

I just used .50 cents as a number to show some basis of how a small amount can add up.

Posted by: Frank Muto at June 16, 2006 09:21 AM

June 14, 2006

The Internet Tax May Be Creeping Up on Us in the Guise of Imposing the Universal Service Fund on Internet-delivered Voice Applications

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