IRS Denies Plan to Tax VoIP Services

Wednesday Jul 21st 2004 by Roy Mark
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Things are looking up for SMBs regarding tax-free Voice over Internet Protocol services.

SMBs looking to cut costs have replaced — or are considering replacing — traditional telephone service with Voice over Internet Protocol (VoIP). Now, in what appears to good news for IP vendors and SMBs, the Internal Revenue Service (IRS) and Treasury Department strongly deny 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 three percent excise tax on telecom services.

The notice prompted a media account saying the IRS was planning on taxing 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," says Treasury spokesperson Terra Bradshaw. "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 yearlong 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.

Adapted from Internetnews.com.

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