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VoIPVoIPPanel DiscussionPanel Discussion

2005 SEATA Conference2005 SEATA ConferenceJuly 12, 2005July 12, 2005

Deborah BierbaumAT&TDirector External Tax Policy

Meredith GarwoodTime Warner CableVice President Tax

OverviewOverview

Overview of VoIP TechnologyOverview of VoIP TechnologyExplore State and Local Tax IssuesExplore State and Local Tax Issues DefinitionsDefinitions NexusNexus SourcingSourcing

Review Federal Tax Legislative InitiativesReview Federal Tax Legislative Initiativesimpacting the state and local taxation ofimpacting the state and local taxation ofVoIPVoIP

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VoIP VoIP –– THETHE Basics Basics

Three (3) Basic TypesThree (3) Basic Types ““Geek-2-GeekGeek-2-Geek”” Box-to-PSTN Box-to-PSTN ““VoIP SandwichVoIP Sandwich”” (PSTN- (PSTN-

to-PSTN w/VoIP)to-PSTN w/VoIP)

Two (2) Different Two (2) Different ““FlavorsFlavors””ApplicationApplicationNetwork/Facilities basedNetwork/Facilities based

Quick RefresherQuick Refresher……terms - IPterms - IP“IP” stands for “Internet Protocol.” - a universallanguage allowing devices / computers tocommunicate.IP is a technique by which information [data,pictures, music, and voice] is digitized into aformat suitable for transport on an IP-basednetwork.IP - organized digital information that travelsthrough a network in a sequence or groupingknown as “packets”. IP based networks areoften also called “packet networks”

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The Value of IP The Value of IP ––One Network One Network –– Many Services Many Services

IP is very, very pervasiveIP is cost effectiveWorks over wired and wirelessLeverages existing infrastructuresIP is very flexible and content agnosticTherefore, allows true convergence of Video Data Voice Other

Internet/IPNetworks

(100,000+ networks)

IP Softphone

IP Phone

VoIPGateway

PBX Gateway Cable Modem

Cable Modem

VoIP Router

DSLLine

PhoneLine

WiFi Access Point

WifiPDA

DSL Modem

Cordless Phone

PBX

iPBX(Gateway)

IP Phone

3G Cellphone

ISPGateway

VoIP Custom Dialer

Telephone

Telephone

PhoneLine

The Future: Any Device to Any Device overAny Network

Desktop

Laptop

LANConnection

VoWifi

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What is VoIP?What is VoIP?Voice over Internet Protocol is both a technology and aservice.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 broadbandIP telephony:Hosted applications: the service operates

independently of the access network (AT&TCallVantage and Verizon VoiceWing)

PacketCable: the service is interlocked with theaccess network (Digital Phone Service from Comcastand Time Warner)

Local Network Wiring - Telco v. IP Phone ArchitectureLocal Network Wiring - Telco v. IP Phone Architecture

DemarcationPoint - House

TelephoneVoice Switch

TA

Router(s)

Cable HFC

CableCo. IPSoft

Switch

Traditional Telephone Company

IP Phone

DSLModem

DemarcationPoint - House

TwistedPair

Copper

DSL Modem &Routers

PublicInternet

PSTN

Cable Headend

PSTNPublicInternet 3rd

PartyIP

SoftSwitch

CableModem

Telco C.O.

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IP Voice Soft Switch SiteIP Voice Soft Switch Site

100,000 Voice100,000 VoiceLines Served fromLines Served fromOnly 4 X 19Only 4 X 19”” Racks Racks

IP VoiceIP VoiceSoftSoft

SwitchSwitch

IP Enabled Contact Centers &IP Enabled Contact Centers &Business LocationsBusiness Locations

NCP800 Adv Features

1-800

IVRIVR

Agent

Agent

Agent

Center 1

MS

IP PBXIP PBX

TDM PBXTDM PBX

PSTNLocal, International

GW

IVRIVR

IP SCP800 Adv Features

TDM PBXTDM PBXAgent

Agent

Center 3

Center 2

AT&T IP/MPLSGlobal Network

TATA

Teleworker AgentAgent

CCE

Router w/ GatewayCards

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VoIP Challenges State Tax SystemVoIP Challenges State Tax SystemData / voice distinction is blurringData / voice distinction is blurring The Internet is increasingly being used for voice andThe Internet is increasingly being used for voice and

datadata VoIP is not simple voice, it is a converged multimediaVoIP is not simple voice, it is a converged multimedia

application supporting voice, data and videoapplication supporting voice, data and videoVoice is becoming an application over IP networksVoice is becoming an application over IP networks VoIP architecture treats the voice packets and theVoIP architecture treats the voice packets and the

signaling as applications on an IP networksignaling as applications on an IP network Phone numbers can be location independentPhone numbers can be location independent Phone calls are going to be distance independentPhone calls are going to be distance independent

Device functionality is convergingDevice functionality is converging New technologies and protocols enable consumersNew technologies and protocols enable consumers

to utilize multiple technologies on one deviceto utilize multiple technologies on one device

Do Federal Regulatory DecisionsDo Federal Regulatory DecisionsApply?Apply?

Federal definition of Federal definition of ““information serviceinformation service”” Interconnection with PSTNInterconnection with PSTN Pending FCC docket re IP-enabled servicePending FCC docket re IP-enabled service CALEA excludes CALEA excludes ““information servicesinformation services”” Florida example: "Information service" meansFlorida example: "Information service" means

the offering of a capability for generating,the offering of a capability for generating,acquiring, storing, transforming, processing,acquiring, storing, transforming, processing,retrieving, using, or making availableretrieving, using, or making availableinformation via communications servicesinformation via communications services

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Aligning State and Local TaxAligning State and Local TaxStatutes with New TechnologiesStatutes with New TechnologiesState and local definitions of taxable telecommunicationsState and local definitions of taxable telecommunicationsdo not necessarily follow FCC or State regulatorydo not necessarily follow FCC or State regulatorydefinitions. Similar differences can exist over interstatedefinitions. Similar differences can exist over interstatecharacter of VoIPcharacter of VoIPAre state and local tax statutes robust enough to keepAre state and local tax statutes robust enough to keeppace with the rapid pace of changes in technology andpace with the rapid pace of changes in technology andconvergence.convergence. Not all statutes, rulings, or opinions are clearNot all statutes, rulings, or opinions are clear Recent commentaries are questioning whether some antiquatedRecent commentaries are questioning whether some antiquated

definitions cover VoIPdefinitions cover VoIP

Current State and Local TaxCurrent State and Local TaxTreatment of VoIPTreatment of VoIP

State and local tax definitions of telecommunicationsState and local tax definitions of telecommunicationsoften include transmission of voice and data regardlessoften include transmission of voice and data regardlessof media or protocolof media or protocolSample statutes:Sample statutes: Or other medium or method now in existence or hereafterOr other medium or method now in existence or hereafter

devised, regardless of the protocol used for such transmission ordevised, regardless of the protocol used for such transmission orconveyance.conveyance.

. . . and Internet telephony.. . . and Internet telephony. The transport over the Internet or any proprietary network usingThe transport over the Internet or any proprietary network using

the Internet protocol of telephone callsthe Internet protocol of telephone calls……

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Recent Rulings and LegislationRecent Rulings and LegislationArkansas Arkansas –– 2005 Act 1879 2005 Act 1879 Telecommunications services includes VOIP.

Florida –– SB 2070 (2005) SB 2070 (2005) Includes transmission without regard to label as VoIP.Includes transmission without regard to label as VoIP.

Illinois Illinois –– Letter Ruling - ST 05-0008-GIL Letter Ruling - ST 05-0008-GIL VoIP is telecommunications subject to tax.

Minnesota – Revenue Notice – 05-03 VoIP is a telecommunications service.

New Jersey New Jersey –– Notice Notice –– 2/23/2005 2/23/2005 VoIP is subject to the sales tax and the 911 tax.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 localVoIP is a telecommunications service subject to state and local

sales tax.sales tax.Wisconsin - Tax Bulletin No. 141 (Jan. 05)Wisconsin - Tax Bulletin No. 141 (Jan. 05) Sales tax applies to VoIP.Sales tax applies to VoIP.

NexusNexusDoes the state or local taxing authority have sufficient“nexus” with many of the providers of VoIP? Scripto v. Carson, 362 U.S.207 (1960)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 tomarket advantages

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Sourcing a TransactionSourcing a TransactionWhat jurisdiction has the right to tax the charge for VoIPservice? Goldberg v. Sweet – US Supreme Court’s 2 out of 3 rule

Determining origination, termination and service address.Area codes, central offices and the InternetCan providers comply

Jefferson LinesGetting on the bus

Streamlined Sales Tax Agreement Sourcing Rule:a sale of telecommunications services sold on a basis other than acall-by-call basis, is sourced to the customer's place of primary use.

Pooled minutesService 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 ofSSTP Definition ofTelecommunicationsTelecommunications

“Telecommunications service” means the electronictransmission, conveyance, or routing of voice, data,audio, video, or any other information or signals to apoint, or between or among points. The term“telecommunications service” includes such transmission,conveyance, or routing in which computer processingapplications are used to act on the form, code or protocolof the content for purposes of transmission, conveyanceor routing without regard to whether such service isreferred to as voice over Internet protocol services oris classified by the Federal Communications Commissionas enhanced or value added. Telecommunicationsservice does not include: * * * *

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Internet Nondiscrimination ActInternet Nondiscrimination Act

SEC. 1108. EXCEPTION FOR VOICESERVICES OVER THE INTERNET.Nothing in this Act shall be construed to affect theimposition of tax on a charge for voice or similarservice utilizing Internet Protocol or anysuccessor protocol. This section shall not apply toany services that are incidental to Internetaccess, such as voice-capable e-mail or instantmessaging.

Streamlined Sales & Use Tax ActStreamlined Sales & Use Tax Act

Each Member State must apply theEach Member State must apply thesimplification requirements of the Agreement tosimplification requirements of the Agreement totaxes on (telecommunications) services.taxes on (telecommunications) services.Exceptions:Exceptions: Requirement for one uniform returnRequirement for one uniform return One rate for each tax typeOne rate for each tax type Base uniformity for each tax type.Base uniformity for each tax type.

Applies to all transaction taxes onApplies to all transaction taxes ontelecommunication services.telecommunication services.Allows States and Localities to requireAllows States and Localities to requirecollection of telecommunications taxes.collection of telecommunications taxes.

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VoIP Regulatory Freedom ActVoIP Regulatory Freedom Act

Section 7 Section 7 –– No State or Local Taxation of No State or Local Taxation ofVoIP Applications.VoIP Applications.a)a)In general. In general. –– No State or political subdivision No State or political subdivision

shall impose any tax, fee, surcharge, or othershall impose any tax, fee, surcharge, or othercharge for the purpose of generatingcharge for the purpose of generatingrevenues for governmental purposes on therevenues for governmental purposes on theoffering or provision of a VoIP application.offering or provision of a VoIP application.

b)b)Exemption. Exemption. –– Subsection (a) shall not apply Subsection (a) shall not applyto a fee imposed for a specific privilege,to a fee imposed for a specific privilege,service or benefit conferred.service or benefit conferred.

The Future: A Borderless WorldThe Future: A Borderless World