Can Voice Over IP Stay Tax-Free?

WASHINGTON -- Cheap phone service over the Internet has high-profile champions who say they'll keep the technology safe from regulation, even as several states consider taxing it.

Both Michael Powell, chair of the Federal Communications Commission, and Senator John Sununu (R-New Hampshire) say they will work this year to keep voice over IP technology free from regulation that could stifle it.

Powerful Supporters

Sununu said last week that he is "preparing legislation to preserve the free regulatory framework that has allowed VoIP applications to reach mainstream consumers." He says he opposes both state and federal regulation of the technology, and wants service vendors to be "free to develop new solutions to address social needs and free to amaze consumers."

Also, Powell said this week he is determined to keep VoIP technology free of government regulation.

"I am excited about VoIP for the same reason I am enthusiastic about so much personal technology--it empowers people, giving them more choice and control," Powell said in a talk at the National Press Club on Tuesday. "One simple point: We do not regulate consumers."

VoIP uses the Internet rather than traditional phone lines to transmit voice communications. The field has drawn new companies such as Vonage as well as telecom veterans like AT&T, which recently announced plans for consumer VoIP services.

Powell also says that he wants to promote a society saturated in broadband technology.

The commission will consider the issue in hearings this year, also inviting public comment, according to an FCC spokesperson.

Consumer Support

"The end result for the consumer [is that in] 2004 you're going to see some interesting market dynamics," says Boyd Peterson, vice president of consumers, media, and entertainment research at the Yankee Group, a research firm. Rollouts from AT&T and cable companies will probably provide new options for consumers, Peterson notes.

"[VoIP offers] tremendous efficiency," says Lee Tien, senior staff attorney for the Electronic Frontier Foundation. "From a consumer standpoint, VoIP will make it much easier to fuse the different kinds of data. It will make it easier to have voice and pictures, video, text, all those things moving across the phone system."

But it's partly that variety and difficulty in defining the technology that makes it controversial. States, which get revenue from telecom companies, would have no way of charging VoIP customers.

Minnesota unsuccessfully sued Vonage, saying the company had to register as a telephone service provider and pay telecom taxes. But a judge ruled that Vonage did not have to register as a phone company.

While that's good news for consumers who benefit from VoIP's cheaper prices, which are partly due to freedom from telecom taxes, other states are also eyeing the potential revenue. Officials in both California and Washington state are arguing with Internet phone service providers over whether VoIP is considered telecommunications or data transmission.