VoIP

Panel Discussion
2005 SEATA Conference July 12, 2005

Deborah Bierbaum AT&T Director External Tax Policy

Meredith Garwood Time Warner Cable Vice President Tax

Overview
Overview of VoIP Technology Explore State and Local Tax Issues
Definitions Nexus Sourcing

Review Federal Tax Legislative Initiatives impacting the state and local taxation of VoIP

VoIP THE Basics

Three (3) Basic Types Geek-2-Geek Geek-2-Geek Box-to-PSTN VoIP Sandwich (PSTNSandwich
to-PSTN w/VoIP)

Two (2) Different Flavors Application Network/Facilities based

Quick Refresherterms - IP
IP stands for Internet Protocol. - a universal language allowing devices / computers to communicate. IP is a technique by which information [data, pictures, music, and voice] is digitized into a format suitable for transport on an IP-based network. IP - organized digital information that travels through a network in a sequence or grouping known as packets. IP based networks are often also called packet networks

The Value of IP One Network Many Services

IP is very, very pervasive IP is cost effective Works over wired and wireless Leverages existing infrastructures IP is very flexible and content agnostic Therefore, allows true convergence of Video Data Voice Other

The Future: Any Device to Any Device over Any Network

Telephone Laptop VoIP Router Cable Modem 3G Cell phone LAN Connection VoIP Gateway VoWifi Cordless Phone Phone Line

Wifi PDA

IP Phone DSL Modem DSL Line ISP Gateway

Internet/IP Networks
(100,000+ networks) PBX Gateway

WiFi Access Point

Cable Modem iPBX (Gateway) IP Softphone IP Phone

Desktop Telephone

Phone Line

VoIP Custom Dialer

PBX

What is VoIP?
Voice over Internet Protocol is both a technology and a service. The technology is Internet protocol that enables packet transmission over data networks. The service is voice transmission. Voice over IP enables new services to be created. Currently there are two common methods for broadband IP telephony: Hosted applications: the service operates independently of the access network (AT&T CallVantage and Verizon VoiceWing) PacketCable: the service is interlocked with the access network (Digital Phone Service from Comcast and Time Warner)

Local Network Wiring - Telco v. IP Phone Architecture

DSL Modem

Demarcation Point - House

Telco C.O. Telephone Voice Switch

DSL Modem & Routers Twisted Pair Copper

PSTN

Public Internet

Traditional Telephone Company IP Phone

Demarcation Point - House
Cable Modem TA

Cable Headend

Router(s)

Cable Co. IP Soft Switch

PSTN
Cable HFC

Public Internet

3rd Party IP Soft Switch

IP Voice Soft Switch Site

100,000 Voice Lines Served from Only 4 X 19 Racks 19

IP Voice Soft Switch

IP Enabled Contact Centers & Business Locations

NCP 800 Adv Features
MS
CCE

IP SCP 800 Adv Features

IVR Center 2

1-800 PSTN Local, International

GW

AT&T IP/MPLS Global Network

IP PBX

Agent Agent

Center 1
TDM PBX

Router w/ Gateway Cards Center 3

TDM PBX TA

Agent Agent

IVR

Agent

Agent

Teleworker Agent

VoIP Challenges State Tax System

Data / voice distinction is blurring The Internet is increasingly being used for voice and data VoIP is not simple voice, it is a converged multimedia application supporting voice, data and video Voice is becoming an application over IP networks VoIP architecture treats the voice packets and the signaling as applications on an IP network Phone numbers can be location independent Phone calls are going to be distance independent Device functionality is converging New technologies and protocols enable consumers to utilize multiple technologies on one device

Do Federal Regulatory Decisions Apply?

Federal definition of information service service
Interconnection with PSTN Pending FCC docket re IP-enabled service CALEA excludes information services services Florida example: "Information service" means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, using, or making available information via communications services

Aligning State and Local Tax Statutes with New Technologies

State and local definitions of taxable telecommunications do not necessarily follow FCC or State regulatory definitions. Similar differences can exist over interstate character of VoIP Are state and local tax statutes robust enough to keep pace with the rapid pace of changes in technology and convergence.
Not all statutes, rulings, or opinions are clear Recent commentaries are questioning whether some antiquated definitions cover VoIP

Current State and Local Tax Treatment of VoIP

State and local tax definitions of telecommunications often include transmission of voice and data regardless of media or protocol Sample statutes:
Or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance. . . . and Internet telephony. The transport over the Internet or any proprietary network using the Internet protocol of telephone calls calls

Recent Rulings and Legislation

Arkansas 2005 Act 1879 Telecommunications services includes VOIP. Florida SB 2070 (2005) Includes transmission without regard to label as VoIP. Illinois Letter Ruling - ST 05-0008-GIL VoIP is telecommunications subject to tax. Minnesota Revenue Notice 05-03 VoIP is a telecommunications service. New Jersey Notice 2/23/2005 VoIP is subject to the sales tax and the 911 tax. Pennsylvania - Sales Tax Bulletin 2005-02 VoIP is a telecommunications service subject to state and local sales tax. Wisconsin - Tax Bulletin No. 141 (Jan. 05) Sales tax applies to VoIP.

Nexus
Does the state or local taxing authority have sufficient nexus with many of the providers of VoIP?
Scripto v. Carson, 362 U.S.207 (1960) Nexus through use of third party contractors Annox Inc. v. Revenue Cabinet, Case No. 03-CI-1605 (Franklin Cir. Ct. March 2005), Upheld a finding by the Kentucky Board of Tax Appeals that
Annox Inc., a switchless reseller, had nexus with Kentucky

America Online, Inc. v. Johnson, Tenn. Ct. Appeals No. M2001-00927-COA-R3-CV (7/30/02) AOL had no physical presence in the state and economic
ties to the state did not equal physical presence.

Confusion over nexus and high tax rates can lead to market advantages

Sourcing a Transaction
What jurisdiction has the right to tax the charge for VoIP service?
Goldberg v. Sweet US Supreme Courts 2 out of 3 rule Determining origination, termination and service address. Area codes, central offices and the Internet Can providers comply Jefferson Lines Getting on the bus Streamlined Sales Tax Agreement Sourcing Rule: a sale of telecommunications services sold on a basis other than a

call-by-call basis, is sourced to the customer's place of primary use. Pooled minutes Service address last default is place of primary use. VoIP calls sold on a call-by-call basis

Is your tax statute out-of-date?

SSTP Definition of Telecommunications

Telecommunications service means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points. The term telecommunications service includes such transmission, conveyance, or routing in which computer processing applications are used to act on the form, code or protocol of the content for purposes of transmission, conveyance or routing without regard to whether such service is referred to as voice over Internet protocol services or is classified by the Federal Communications Commission as enhanced or value added. Telecommunications service does not include: * * * *

Internet Nondiscrimination Act

SEC. 1108. EXCEPTION FOR VOICE SERVICES OVER THE INTERNET.
Nothing in this Act shall be construed to affect the imposition of tax on a charge for voice or similar service utilizing Internet Protocol or any successor protocol. This section shall not apply to any services that are incidental to Internet access, such as voice-capable e-mail or instant messaging.

Streamlined Sales & Use Tax Act

Each Member State must apply the simplification requirements of the Agreement to taxes on (telecommunications) services. Exceptions:
Requirement for one uniform return One rate for each tax type Base uniformity for each tax type.

Applies to all transaction taxes on telecommunication services. Allows States and Localities to require collection of telecommunications taxes.

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VoIP Regulatory Freedom Act

Section 7 No State or Local Taxation of VoIP Applications.
a)In general. No State or political subdivision a)In shall impose any tax, fee, surcharge, or other charge for the purpose of generating revenues for governmental purposes on the offering or provision of a VoIP application. b)Exemption. Subsection (a) shall not apply b)Exemption. to a fee imposed for a specific privilege, service or benefit conferred.

The Future: A Borderless World

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