VoIP: Telecom or Information Service?

Is VoIP a telecommunications service or an information service?

While the sales and use tax world waits with baited breath for a decision by the US Supreme Court in the Wayfield case on whether the nexus standard of physical presence (Quill) will be overturned or modified in some way (see Quill: Background and Outline for more context), in the telecommunications tax and regulation world, there is a Minnesota case now on appeal to the Eighth Circuit of Appeals that should be drawing similar attention.  The name of the case is Charter Advanced Services (MN), LLC, and Charter Advanced Services VIII (MN), LLC, v. Minnesota Public Utilities Commission (MPUC). The lower court held that Minnesota may not regulate VoIP-provider Charter because it is an information service, not a telecommunications service. [www.gpo.gov/fdsys/pkg/USCOURTS-mnd-0_15-cv-03935/pdf/USCOURTS-mnd-0_15-cv-03935-0.pdf]

The case is providing yet another stage for the latest round in the battle between the federal and state governments over the legal character of VoIP as a telecommunications service or an information service, which has far-reaching consequences for all states on both the taxation and regulation of VoIP.  Minnesota’s MPUC has appealed the case, and recent amicus briefs in support of the decision [apps.fcc.gov/edocs_public/attachmatch/DOC-347483A1.pdf] and opposed to the decision [nasuca.org/nwp/wp-content/uploads/2013/11/Joint-NARUC-NASUCA-Amicus-Brief-VOIP-8th-Cir-9-5-2017.pdf] are shedding more light on the issues.

Whether or not the case is affirmed or reversed, the challenges of staying compliant with both federal and state tax and regulatory rules on VoIP remain not only for companies, but the consultants who advise them and offer accounting and technological solutions for getting and remaining compliant.

The business background

This issue is hardly new and that is perhaps what is baffling many practitioners:  why the FCC has not yet settled the now-decades-old issue and therein lies the tale [www.ibtimes.com/fcc-will-help-telecoms-dodge-state-regulations-voip-services-2612277].   Stated broadly, if VoIP is a telecommunications service, it gets taxed and regulated in the same way as “traditional” telecommunication services by both the federal and state authorities, but if it is an information service, it may not be subject to state regulation at all.

Against the background of the now well-recognized need of states for new sources of revenue, as well as the complaints from some traditional telecommunication companies of unfair competitive advantage in favor of VoIP firms like Vonage for example, the pressure to treat ever-changing transformational technologies like VoIP as a telecommunication service is great.  The VoIP provider, on the other hand, want to be considered an information service and therefore, either not regulated or taxed at all or at least much less than a telecommunications service.

The technical background in brief

Charter Communications, Inc. (“Charter”), is a national communications company that provides services to residential and business customers—such as cable video, broadband internet access, and voice communications. One of the features it offers its customers is real-time, two-way voice calling, which it currently markets as “Spectrum Voice” by using Voice over Internet Protocol (“VoIP”) technology, which transmits voice signals via a broadband internet connection as Internet Protocol (“IP”) data packets.

In contrast, “traditional” telephone networks (commonly known as the “public switched telephone network” or “PSTN”) provide voice telephony services using “circuit switching” technology, in which a dedicated pathway is established over the line for the duration of a call. To route multiple calls over the same PSTN, traditional telephone providers use a technique known as Time Division Multiplexing (“TDM).

For Charter to effect transmission of voice signals as IP data packets, it provides its Spectrum Voice subscribers with a device known as an embedded Multimedia Terminal Adapter (“eMTA”). The eMTA is housed in the same device as the cable modem that provides access generally to Charter’s broadband internet service.  The eMTA alters the format of voice calls between an analog electrical signal—as transmitted by the customer’s handset—and the IP data packets transmitted over Charter’s cable network.
When a Charter customer calls or receives a call from a subscriber of a traditional telecommunications carrier, the call must be converted between IP and TDM—a process commonly referred to as “protocol conversion.” Because it offers this capability to interact seamlessly with PSTN networks, Spectrum Voice is an “interconnected” VoIP service. Although not all Spectrum Voice calls involve protocol conversion, most of Charter’s voice traffic in Minnesota currently does so.   In addition to providing voice transmission, Spectrum Voice has the capability to provide customers with several additional communications features, such as allowing customers to access voicemails as digital audio files, converting voicemails to text, and forwarding them via email.

The legal background

Prior to March 2013, Charter offered VoIP services in Minnesota through two affiliates (“Charter Fiberlink”).  In March 2013, Charter Fiberlink assigned its retail voice customers to the newly-established Charter Advanced.  The frank purpose behind the assignment was to limit the reach of state regulation, thereby enhancing Charter’s market competitiveness. The Minnesota Department of Commerce (“MDOC”) responded to Charter’s realignment by filing a complaint with the Minnesota Public Utilities Commission (MPUC). The complaint raised fifteen separate allegations, including that Charter was in violation of several Minnesota statutes.  Charter responded, in part, by arguing that state regulation of Spectrum Voice is preempted by federal law.  Minnesota rejected that argument and ordered Charter to comply with applicable Minnesota rules and regulations. Charter responded to the MPUC’s decision by instituting the present action.

District Court Holds in Favor of Charter—VoIP is an Information Service

When the Federal Government acts within the authority that it has under the Constitution, it is empowered to pre-empt state laws to the extent it is believed that such action is necessary to achieve its purposes, and there is in this case, “simply no doubt” that the F.C.C. has this general authority.

The source of regulatory authority in this matter is the Telecommunications Act of 1996 (amending the Communications Act of 1934) [transition.fcc.gov/Reports/1934new.pdf].  The Act broadly divides communication services into two main categories: “telecommunications services,” and “information services”.

Under the statutory structure, a telecommunications service is the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.”

An information service, by contrast, is the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.

The Court concluded that Charter’s Spectrum Voice offering is an “information service,” because inherent in its operation is the ability to engage in protocol conversion—thereby “transforming” the customer’s information for purposes of the Telecommunications Act of 1996. Accordingly, state regulation of Spectrum Voice is preempted and impermissible.   Now we will wait to see if the Eighth Circuit Court of Appeals agrees with the district court.

State taxation of VoIP

The table below provides a high-level flavor of some of the differing approaches among the states currently for taxing VoIP. Each of the differences must be accounted for and applied to a tax solution in much greater detail. And of course, these rules will continue to evolve almost constantly, not only as a result of this Court’s, as well as future court and administrative decisions, but also as a result of constant technological change.