IRS Denies VoIP Tax Plan Claims

The Internal Revenue Service (IRS) and
Treasury Department strongly denied Thursday they are considering an excise
tax on Internet telephone calls or any other IP-based services.

On July 1, the IRS published in the Federal Register a request for public
comments on changes in the telecommunications industry since 1965, when the
tax code was last updated to define telecommunications services. Based on
those definitions, the IRS currently imposes a 3 percent excise tax on
telecom services.

The notice prompted a media account saying the IRS was planning on taxing
Voice over Internet Protocol (VoIP) services. A week later, the story was
referenced at a U.S. House hearing on possible VoIP regulations.

“Nothing in the notice said anything about taxing VoIP, and that is not under
consideration by Treasury and the IRS,” Treasury spokesperson Terra Bradshaw
told internetnews.com. “Any report to the contrary is simply
incorrect.”

In the Federal Register notice, the IRS states, “Since 1965, numerous
communications services have been developed and marketed, the methods of
transmission have expanded and the industry has been deregulated.”

As a result of those changes, according to the IRS, questions have arisen
concerning the applicability of the telecom definitions to “certain
communications services” that were not available in 1965.

“In response to these questions, Treasury and the IRS are considering
proposing regulations that would revise the existing regulations to reflect
changes in technology,” the notice states.

The notice says the test for taxability is whether a service paid for by
consumers is a “communications service. The purpose of this [notice] is to
solicit information from the public on how present technology should be
treated within the description of telephonic or telephonic quality
communication in the definitions of local and toll telephone service.”

Bradshaw noted that the current IRS regulations are more than 40 years old
and that the “telecommunications industry has changed dramatically since
then. It has absolutely nothing to do with
VoIP and nothing to do with taxing VoIP. It is really the most innocuous
thing.”

The IRS inquiry comes as both Congress and the Federal Communications
Commission (FCC) are considering rules that would exempt VoIP from state
regulations and tariffs.

The key decision for the FCC, which is conducting a year-long evaluation of
VoIP services, is whether Internet telephony and other IP-enabled services
are a “telecommunications” or “information” service. As a telecommunications
service, VoIP would be subject to the same state rules and tariffs as
telephone companies. As an information service, VoIP would be exempt.

Several bills are now pending before Congress that would pre-empt FCC action
by legally defining VoIP as an information service.

The bills do carry some federal obligations for VoIP providers, requiring
the FCC to impose universal service fees on VoIP customers. But they exclude VoIP
applications that do not interconnect with the public switched telephone
network (PSTN) .

Most VoIP providers route calls from leased PSTN local telephone lines to a
gateway server that converts analog voice into data packets. From there, the
data packets move over the public Internet or a private backbone to its
destination, where it goes through another gateway, rolling over to a PSTN
local line.

While VoIP is clearly a phone service, it is shipped as data packets, which
is why providers argue these types of calls shouldn’t be regulated in the
same manner as PSTN telephone carriers.