Entering the VoIP MarketBy Thomas K। Crowe, Esq.
Entering the communications market as an IP-telephony (or VoIP) provider (whether prepaid or postpaid) entails legal and regulatory considerations increasingly comparable to operating as a conventional or legacy telecommunications provider। This article attempts to summarize those legal and regulatory considerations most relevant to interconnected VoIP providers.
Pursuant to several rulings, providers of VoIP services fitting the Federal Communications Commission's (FCC's) definition of "interconnected VoIP service" are now required to register with the FCC; contribute to the FCC's Universal Service Fund (USF), as well as FCC programs covering TRS, NANPA, LNP and Regulatory Fees; comply with E911 and Communications Assistance for Law Enforcement Act (CALEA) obligations; comply with the FCC's Customer Proprietary Network Information (CPNI) obligations; and comply with a diverse array of state tax and assessment obligations. In short, offering an interconnected VoIP service (whether "nomadic" or "fixed") is no longer an unregulated undertaking.
Interconnected VoIP Regulation
Interconnected VoIP Service. The FCC has defined "interconnected VoIP service" as those VoIP services that: 1) enable real-time, two-way voice communications; 2) require a broadband connection; 3) require IP-compatible customer equipment; and 4) permit subscribers to receive calls from and place calls to the Public Switched Telephone Network. Such VoIP providers are subject to the regulatory requirements summarized below. Providers that do not fall within the definition will be subject to different regulatory treatment.
FCC Registration (Form 499-A)। Interconnected VoIP providers must file an FCC Form 499-A registration with the Universal Service Administrative Company (USAC)। The FCC Form 499-A serves to register the company with the FCC and USAC as a provider of U।S. domestic, interstate services. This registration also automatically ties the company into the FCC's USF contribution system, identifying the company as a potential contributor under the program. Among other things, the form requires the company to list an agent for service of process in the District of Columbia and identify the states in which the company is likely to provide service. For more information, see http://www.tkcrowe.com/fcc-forms-499/.
USF Contributions। Without determining whether VoIP services are "telecommunications services" or "information services," the FCC has concluded that interconnected VoIP providers are "providers of interstate telecommunications" for purposes of USF, and thus must contribute to USF. USF fees subsidize or underwrite telecommunications services for a number of different groups including residents of rural areas, low-income consumers, rural health care providers, schools and libraries. USF contributions are calculated based on quarterly submissions of FCC Form 499-Q and annual submissions of FCC Form 499-A (due each April 1st). Providers are then billed monthly and payment is required on a monthly basis. The contribution rate, which changes quarterly, has in recent years run at approximately 12-15 percent of combined interstate/international revenues, and presently stands at 15.3%.
Interconnected VoIP Service. The FCC has defined "interconnected VoIP service" as those VoIP services that: 1) enable real-time, two-way voice communications; 2) require a broadband connection; 3) require IP-compatible customer equipment; and 4) permit subscribers to receive calls from and place calls to the Public Switched Telephone Network. Such VoIP providers are subject to the regulatory requirements summarized below. Providers that do not fall within the definition will be subject to different regulatory treatment.
FCC Registration (Form 499-A)। Interconnected VoIP providers must file an FCC Form 499-A registration with the Universal Service Administrative Company (USAC)। The FCC Form 499-A serves to register the company with the FCC and USAC as a provider of U।S. domestic, interstate services. This registration also automatically ties the company into the FCC's USF contribution system, identifying the company as a potential contributor under the program. Among other things, the form requires the company to list an agent for service of process in the District of Columbia and identify the states in which the company is likely to provide service. For more information, see http://www.tkcrowe.com/fcc-forms-499/.
USF Contributions। Without determining whether VoIP services are "telecommunications services" or "information services," the FCC has concluded that interconnected VoIP providers are "providers of interstate telecommunications" for purposes of USF, and thus must contribute to USF. USF fees subsidize or underwrite telecommunications services for a number of different groups including residents of rural areas, low-income consumers, rural health care providers, schools and libraries. USF contributions are calculated based on quarterly submissions of FCC Form 499-Q and annual submissions of FCC Form 499-A (due each April 1st). Providers are then billed monthly and payment is required on a monthly basis. The contribution rate, which changes quarterly, has in recent years run at approximately 12-15 percent of combined interstate/international revenues, and presently stands at 15.3%.
Interconnected VoIP providers must file an annual FCC Form 499-A (due on April 1st), and may be required to file quarterly FCC Forms 499-Q (due on February 1st, May 1st, August 1st, and November 1st of each year). For more information, see http://www.tkcrowe.com/fcc-forms-499.
Like wireless providers, interconnected VoIP providers can report revenues by using 1) a "safe harbor" (set at 64.9%); 2) actual revenues; or 3) a traffic study to estimate interstate revenues. The FCC set the VoIP "safe harbor" at 64.9% because it determined that interconnected VoIP service is predominantly used for interstate and international service, like wireline toll service. The percentage of interstate revenues reported to the FCC by wireline toll providers is 64.9%, so the FCC established the same percentage as a "safe harbor" for interconnected VoIP providers.
Other Federal Assessments। In addition to the payment of USF contributions, interconnected VoIP providers are also subject to other federal regulatory assessments. Specifically, such providers are required to contribute to the following programs: TRS, NANPA, and LNP. These factors all vary annually, and LNP additionally varies by region. They were most recently assessed as follows: TRS at 1.137%, NANPA at .00107%, and LNP at up to .0036% of intrastate (LNP and NANPA only), interstate, and international end-user revenues. In addition, interconnected VoIP providers are required to pay FCC Regulatory Fee assessments which are assessed annually, usually in September. They were last assessed at .342% of interstate and international end-user revenues in September 2009.
VoIP E911. As a result of FCC regulations as well as the New and Emerging Technologies 911 Improvement Act of 2008 (NET 911 Act), interconnected VoIP providers are required to provide 911 and E911 service. To facilitate an interconnected VoIP provider's provision of 911 and E911 service, the NET 911 Act requires the owner or controller of a capability that can be used for 911 or E911 service to make that capability available to a requesting interconnected VoIP provider. Typically, owners or controllers of such capabilities include incumbent local exchange carriers, wireless service providers, states, localities, and Public Safety Answering Points (PSAPs), and third party commercial providers which route E911 calls to the appropriate PSAP.
Pursuant to FCC rules, interconnected VoIP providers must 1) transmit all 911 calls to the appropriate PSAP, designated statewide default answering point, or appropriate local emergency authority; 2) transmit a callback number (automatic numbering information or ANI) for each 911 caller to the PSAP; and 3) transmit the caller's "Registered Location" to the PSAP।
An interconnected VoIP provider must also advise all subscribers to its service (existing and new) of the circumstances under which E911 service may not be available or may be limited in comparison to traditional E911 service (i।e., power outages, Internet connection failure and network congestion). These notifications must be prominent and in plain language. Such providers must obtain, and maintain a record of, an affirmative acknowledgement from all subscribers that they received this advisory and understood it. Customers must also be notified as to E911 limitations via warning stickers that the customer is instructed to place on or near VoIP handsets.
Law Enforcement/CALEA। Interconnected VoIP providers must comply with CALEA obligations. CALEA is intended to preserve the ability of law enforcement agencies to conduct electronic surveillance by imposing specific obligations on "telecommunications carriers" for assisting law enforcement, including delivering call interception and call identification functionality to the government with a minimum of interference to customer service and privacy.
Specifically, CALEA imposes obligations on interconnected VoIP providers to assist law enforcement, including with respect to 1) call intercepts; 2) accessing call identifying information; 3) delivering intercepted communications and call identifying information to the government; and 4) doing so with a minimum of interference to subscriber service and privacy। Interconnected VoIP providers must also be able to provide law enforcement with specific types of call information, referred to as "punch list" capabilities, which include 1) content of subject-initiated conference calls; 2) party hold, join, drop on conference calls; 3) subject-initiated dialing and signaling information; 4) in-band and out-of-band signaling; 5) timing information; and 6) dialed digit extraction. In short, this means that interconnected VoIP providers are required to, upon receipt of a court order or lawful request, make this specific information available to law enforcement in an acceptable format.
To facilitate these efforts, interconnected VoIP providers are also required to file with the FCC a CALEA System Security and Integrity (SSI) Plan, which outlines the policies and procedures each provider has implemented to ensure compliance with CALEA's various recordkeeping and procedural requirements. The SSI Plan must also provide the FCC with contact information for a senior officer or employee designated to oversee a provider's compliance with CALEA. SSI Plans must be filed with the FCC before a provider begins providing services to customers.
CPNI। Interconnected VoIP providers are required to comply with the FCC's heavily-enforced regulations governing CPNI. CPNI is the individually identifiable information that is created by a customer's relationship with a provider, such as data about the frequency, duration, and timing of calls, the information on a customer's bill, and call identifying information. While the rules in this area are complex, they can be broken down into the following categories: a) authorization procedures, b) marketing restrictions, c) procedures for responding to CPNI security breaches, and d) the obligation to file an annual CPNI Certification.
Since the release of call detail information over the telephone presents immediate risk to privacy, interconnected VoIP providers are prohibited from releasing call detail information based on customer initiated telephone contact except under three circumstances। These are 1) when the customer provides a pre-established password; 2) when a customer requests that the information be sent to the customer's address of record; or 3) when a provider calls the telephone number of record and discloses the information. In addition, providers must provide mandatory password protection for online account access.
Interconnected VoIP providers must obtain opt-in consent from a customer before disclosing a customer's CPNI to a joint venture partner or an independent contractor for the marketing of communications-related services to the customer. Such affirmative consent may be in oral, electronic or written form after providing appropriate notice.
If there has been a breach of CPNI, providers must provide electronic notification of the breach within seven business days to the United States Secret Service (USSS) and the Federal Bureau of Investigation (FBI). In order to allow law enforcement time to conduct an investigation, carriers must wait another seven business days before notifying the affected customers of the breach (unless the USSS and FBI request that the carrier continue to postpone disclosure).
Finally, interconnected VoIP providers must file an annual certification with the FCC due by March 1st, explaining any actions that they have taken against data brokers and summarizing all consumer complaints that they have received during the year relating to the unauthorized release of CPNI. Significantly, the certification must also be accompanied by a summary of the provider's CPNI policies. In recent years, the FCC's Enforcement Bureau has aggressively levied penalties against large numbers of providers which fail to make the annual March 1st CPNI Certification filing or otherwise comply with the FCC's substantive CPNI requirements.
Disability Access and TRS। In another recent order, adopted May 31, 2007, the FCC extended disability access requirements to interconnected VoIP providers and equipment manufacturers (for the benefit of individuals with hearing or speech disabilities). Specifically, this requires VoIP providers and manufacturers to evaluate the accessibility of their equipment and services, design or develop accessible equipment and services, and provide accessibility information with respect to their equipment and services.
E-Rate Funding। In a recently-released ruling, the FCC extended E-Rate funding eligibility to interconnected VoIP providers. Since its implementation in 1998, the FCC's E-Rate program has provided discounts on eligible telecommunications and information services to schools and libraries under the Schools and Libraries Universal Service Support Mechanism. USAC reimburses service providers on discounts that are passed on to participating schools and libraries. As a result of the ruling, interconnected VoIP services are now eligible for funding under the E-Rate program.
Diverse State Requirements. While state regulation of interconnected VoIP services remains relatively streamlined, state tax and assessment levies are growing increasingly complex. State regulation of VoIP generally encompasses consumer protection issues, E911, CPNI and general business law principles. Although a handful of states requires an upfront registration submission from a VoIP provider before commencing services, traditional state entry requirements such as Certificates of Public Convenience and Necessity have been preempted with respect to nomadic VoIP services. Moreover, in 2009, a federal court of appeals preempted the ability of states to assess state USF assessments with respect to nomadic VoIP services.
State tax and assessment laws are either worded broadly enough to already encompass interconnected VoIP services, or states increasingly and aggressively take the position that such tax and assessment laws apply to interconnected VoIP services since they are a substitute for conventional telephony services। The net effect of this is that a varied array of taxes and assessments, which differ on a state-by-state basis, potentially apply to VoIP services. These taxes and assessments need to be carefully examined, individually and on a state-to-state basis, to determine applicability.
As a general rule, the following taxes and assessments apply to interconnected VoIP services: a) sales and use taxes; b) gross receipts taxes; c) excise taxes; d) franchise taxes; e) utility taxes; f) E911 surcharges; and g) various state and local assessments and charges। By way of example, Illinois assess a 7% telecommunications excise tax applicable to all gross charges assessed by a provider to a service address within the state of Illinois. The tax specifically applies to VoIP services. Pennsylvania applies a 6% sales tax to all telecommunications services, including interconnected VoIP services. In 2005, the Pennsylvania Department of Revenue issued a sales tax bulletin which concludes that VoIP is a taxable telecommunications service subject to Pennsylvania state and local sales tax.
State taxation and regulation of VoIP services is an evolving area and considerable ambiguity and confusion remains। In the case of nomadic VoIP services, one such issue is which taxing jurisdiction's laws to apply. For example, with nomadic VoIP, a customer can access the internet to make a call from any broadband connection, which means that calls can originate in multiple states. Is the call tax based upon where it originates, the customer's primary place of use, or the customer's billing address? As a result of federal legislation, mobile service providers apply taxes based upon specific sourcing guidelines, but no such definitive standard has been established for interconnected VoIP services.
Another complex area for VoIP providers is the payment of 911 fees। In many cases, states delegate 911 assessments to local authorities which collect the surcharges and administer local 911 funds. For example, in Illinois, each county or municipality administers its own 911 fund, each having its own assessment amount, for which payments are remitted. Such a regime can result in the need for tracking and remitting assessments in dramatically different ways down to the municipality level throughout a given state.
By contrast, federal assessment mechanisms, covered above, are relatively clear-cut। They encompass USF assessments, the payment of TRS, NANPA, and LNP, as well as FCC Regulatory Fees. Unlike state assessments and taxes, relatively clearly defined forms and methodologies exist for federal assessments and remittances.
Entering the market as a VoIP provider entails a wide range of federal legal and regulatory considerations, both upfront and on an ongoing basis। This challenge is compounded by a complex array of state tax and assessment obligations which must also be satisfied.
The author is a Washington, D.C.-based attorney specializing in VoIP and other communications legal and regulatory matters. To obtain additional information regarding any of the issues covered above, please contact Thomas K. Crowe at (202) 263-3640 or visit our website at http://www.tkcrowe.com/. The foregoing is intended to provide a general overview only and should not be viewed as a substitute for conferring with qualified legal counsel. Each new client will have unique requirements that should be analyzed by counsel. Please note that these materials were last updated on March 31, 2010, and do not include developments occurring after that date.
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