Voice over IP

The Tax Man Cometh?

In their eagerness to jump-start a new revenue stream (Internet-based telephone service), many would-be providers have overlooked the issue of taxes.

by Gerry Blackwell
[October 13, 1999]

ISPs thinking of breezing into the telephone business using VoIP technology might want to give some thought to taxes and other government assessments they'll probably have to pay as telephone service providers.

And they'd better do it now when (or before) they're starting up rather than waiting for the tax man to come along and tell them what they owe.

That's the advice attorney David Bolduc of Austin, Texas-based McCollough & Partners gives his ISP clients, several of whom already offer VoIP services or are considering doing it.

Oh, by the way . . .
After we published a column on ISPhone, a Traverse City, Michigan company that offers an interesting turnkey solution for ISPs who want to offer long distance telephone services using VoIP, Bolduc e-mailed us with a sobering list of levies ISPs could conceivably be assessed.

"These can add up to a very significant percentage of total charges—possibly more than 15 percent," Bolduc wrote. "And there can be significant penalties for not collecting and paying them."

Some Internet telephony service providers (ITSPs) are pitching that they can offer telephone service cheaper because they don't have to pay the taxes and other assessments to which traditional telephone companies are subject, Bolduc says. But it ain't necessarily so.

At the very least, he believes, ITSPs should be collecting and remitting state telecommunications taxes—in Texas they can run as high as 8.25 percent—and federal excise taxes of 3 percent. His clients are doing that now.

Better safe than sorry
At this point, it's more a way of avoiding hassles down the road. To Bolduc's knowledge, neither the IRS, nor the state comptroller, the tax collector in Texas, has pursued ISPs offering VoIP services—but both have told him they will.

It's possible ISPs could challenge the applicability of these levies in court, but it may be difficult given that the governing legislation defines qualifying services as offering "telephonic quality communications."

Since most VoIP service vendors market their services as having telephonic quality, it might be difficult to argue otherwise in tax court.

Meanwhile both the IRS and the Texas comptroller have studied the situation and, according to Bolduc, decided that "if it walks like a duck and quacks like a duck, it's a duck."

In other words, if you offer telephone service, you're a telephone service provider, and you're subject to the taxes telephone service providers pay.

"It's a case where the least painful thing may be to collect and pay the assessment and sue to get it back," Bolduc says. "It's just less complicated." Not paying could lead to a nightmare of expensive entaglements with taxmen.

"Imagine if two years down the road, the government told you you owed 8.25 percent of all your revenues?"

Reality check
It's important for ISPs contemplating offering VoIP services to think about this now before they go any further, he says. For one thing, it will have an impact on how they set up their billing software.

It could also effect their pricing strategy. "If you sit down to work out a pricing scheme based on what you think your cost sructure is, you need to take this into account," Bolduc says. "You need to consider which of [these assessments] you can pass on to customers and which you can't."

Although state telecommunications and federal excise taxes are the two that ITSPs are most likely to have to pay, Bolduc has a long list of others they could be dinged for.

These include:

• State Universal Service Fund assessments on "telecommunications providers"—3.579 percent in Texas. "It may well not apply," Bolduc says, "but I know of no final decision that it does not."
• State Telecommunications Infrastructure Fund assessments on sellers of "telecommunications services"—0.925 percent in Texas. The Texas tax collector thinks it applies VoIP services providers.
• Federal Universal Service Fund assessments—a similar situation to state fund assessments.
• Access charges and FCC regulatory fees: This is the big one the IP telephony community lives in fear of. So far, Bolduc points out, the FCC has not said VoIP service providers are definitely not subject to these assessments. It just hasn't said definitely that they are.

Something to think about.

—End

Read other Internet telephony articles by Gerry Blackwell