Internet Telephony-Friend or Foe? Congress Has Introduced Legislation That Would Extend Preemptions of State and Local Taxing Authority to Virtually Any Regulation of VoIP Services, Threatening Millions of Dollars in State and Local Revenues

Article excerpt

Just as consumers were learning to navigate the new wireless world, a new technology has emerged that is again transforming the way individuals and businesses exchange information. Voice over Internet Protocol, or VoIP as it is commonly called, transmits telephone calls over a broadband Internet connection instead of a regular telephone line. The technology promises both highly customized telephone service and lower telephone bills. In the words of Federal Communications Chairman Michael Powell, VoIP represents the "most significant paradigm shift in the entire history of modern communications since the invention of the telephone."

VoIP converts the voice signal from your telephone into a digital signal that travels as data packets over the Internet to a regular telephone number, where the signal is converted back to voice. Most VoIP calls are placed using a traditional telephone with an adapter that connects to a high-speed Internet connection. The call goes through your local telephone company to a VoIP provider, then over the Internet to the receiver's local telephone company where it is completed. Some VoIP services facilitate calls directly from a computer to either another computer or an ordinary telephone. VoIP providers can charge less for calls than telephone companies because this method of voice delivery avoids many of the circuit switching fees associated with traditional analog telephone calls.

VoIP was first considered a toy for techies. But as with the advent of wireless and the Internet, the mainstream market is now catching on to this technology. As a result, a growing number of telecommunications companies offer or plan to offer VoIP services. This trend has significant implications for state and local governments. These implications are addressed in the balance of this article.


The introduction of a new technology into the marketplace is often met with mixed emotion by state and local governments. On one hand, new technologies like VoIP offer more convenient and less expensive ways of exchanging information. On the other hand, the telecommunications industry's claim that increased regulation of new technologies would inhibit its growth has led to federal encroachment on the traditional authority of state and local governments. This encroachment began with the enactment of the Telecommunications Act of 1996, whereby Congress limited or preempted state and local taxing, franchising, and zoning authority over some telecommunications providers and services.

Attempts to limit or preempt state and local authority have continued as new technologies have emerged in the marketplace. In the case of VoIP, however, these efforts have become the most far-reaching. Congress has introduced legislation that would extend preemptions of state and local authority to virtually any regulation of VoIP services, including taxing, franchising, zoning, E-911 services, wiretapping, criminal and consumer protection laws, and the collection of access fees and funds for universal service.

At the heart of the debate over the regulation of VoIP is the question of whether these services are telecommunications services, like ordinary telephone service, or computer-based information services. Providers of VoIP services argue that Internet-based telephony (VoIP) is an information service that should be exempt from the many regulations governing traditional phone companies. However, states and localities argue that VoIP is one of several competing technologies that deliver voice communications, just like traditional landline and wireless voice providers. As such, VoIP services should be taxed in the same manner as traditional voice communications services.

Moreover, a broad preemption of state and local taxation of VoIP services would have a detrimental impact on state and local budgets. According to a February 13 letter by Douglas Holtz-Eakin, director of the Congressional Budget Office, to Sen. …


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