VoIP bashed by threat of huge taxes

A key US Senate committee approved legislation that would authorize state governments to impose hefty taxes on internet phone services.

The Senate Committee on Commerce on Thursday rewrote a bill that originally was intended to shield the fledging voice over Internet Protocol (VoIP) industry from state regulation. Senator John Sununu had intended his legislation to reserve that authority to the Federal Communications Commission. His bill initially said that no state or local government "may enact or enforce any law, rule" or regulation that targets VoIP services.

But in an unexpected twist, Senator Byron Dorgan persuaded the committee to adopt an amendment that permitted states to regulate VoIP services in two ways: levying taxes to pay for universal service and for compensating traditional telephone companies for the use of their phone lines through so-called access charges.

Other changes to the bill specify that it expires after three years and requires a report on whether police are encountering problems when wiretapping VoIP conversations. A second amendment, from Senator Conrad Burns lets states require VoIP firms to "pay appropriate compensation" for 911 services.

VoIP lobbyists claim that those fees are already being paid directly or indirectly. A white paper released last month by the VON (Voice on the Net) Coalition, which includes Net2Phone, Pulver.com, Microsoft and Intel, says "phone companies are already fully compensated for their costs when internet phone calls are terminated on their networks" and that universal service charges are also covered.

Brooke Schulz, a spokeswoman for VoIP provider Vonage, said her company was "disappointed" by the vote.

"We thought the original proposed legislation was the best route," Schulz said. "It was a good policy decision, but obviously, there are a lot of amendments that came on at the end that we think are very problematic for our industry."

VoIP providers are hoping that Congress will grant them protection from state governments eyeing VoIP as a potentially lucrative revenue source, while the FBI and Department of Justice are lobbying to extend telephone-wiretapping laws to the nascent technology.

About 2.8 million people make phone calls over their broadband connection, a figure that includes about 2.2 million cable customers using circuit-switched technology and about 600,000 VoIP subscribers. Corporations are gravitating toward VoIP even faster than consumers, with as many as one in 10 business calls that once travelled over the traditional voice network now being completed entirely over the internet.

Verizon Communications began offering VoiceWing, its long-awaited broadband phone service that could challenge AT&T, Vonage and other top providers of internet phone calls.

It's unclear what will happen next to the Senate VoIP bill. There's not much time left this year for the full Senate to act on the measure, and the House of Representatives is considering bills that take slightly different approaches.

Originally, the Sununu bill regulated only "connected" VoIP firms that link to the public telephone network. But the revised version permits states to levy universal-service and access-charge taxes on any application - including instant-messaging and voice chat clients - that relies on "multidirectional voice communications over the public Internet or a private network utilising Internet Protocol."

Sununu tried to give the bill the happiest face possible in a statement. "Despite the addition of two amendments, the basic message is clear: Congress does not want states implementing new regulations that will inhibit this emerging technology," he said.

Declan McCullagh writes for CNET News.com