IRS eyes Net phone taxes

[dave () farber net]

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...... Forwarded Message .......
From: Kurt Albershardt <kurt () nv net>
To: dave () farber net
Date: Wed, 07 Jul 2004 08:09:05 -0700
Subj: IRS eyes Net phone taxes

By Declan McCullagh
Staff Writer, CNET News.com
http://news.com.com/2100-7352-5258809.html

Story last modified July 6, 2004, 4:21 PM PDT



A "temporary" tax created to pay for the Spanish-American War may result in 
higher fees for Internet telephone calls.

The IRS and the Treasury Department have suggested that an existing federal 
excise tax on phone calls should be interpreted to apply to voice over 
Internet Protocol (VoIP) calls, a move that promises to roil the 
fast-growing industry and follows similar attempts by state officials to 
tax or regulate the technology.

In a notice published Friday, the IRS and Treasury Department said they are 
considering whether the 3 percent federal excise tax should be 
reinterpreted "to reflect changes in technology" used in "telephonic or 
telephonic quality communications."

"They're looking at VoIP and any other potential technologies that are 
flying under the radar," said Glenn Richards, a partner at the law firm 
Shaw Pittman in Washington who represents VoIP companies. "Clearly they're 
trying to extend their jurisdiction to apply the excise tax to as many 
'calls' as they can. It's got to be a revenue issue for them. If everyone 
starts migrating to new platforms, they're facing a decrease in excise 
taxes."

IRS spokeswoman Tara Bradshaw said that the agency is in the "very 
beginning of the process" of updating its regulations on what is covered by 
the tax code's definition of telephone service. "We're just requesting 
information," she said. "We're not creating new rules at this point. We're 
just requesting comments."

The IRS notice opens up another, unexpected front in a burgeoning battle 
over the regulatory status of VoIP, which already has pitted state 
regulators against the Federal Communications Commission and has led the 
FBI to propose that wiretapping laws designed for the traditional phone 
network be extended to Internet voice communications. About 2.8 million 
people make phone calls over their broadband connection, a figure that 
includes about 2.2 million cable customers using circuit-switched 
technology. Roughly 600,000 people of the 2.8 million total use VoIP. 
Corporations are gravitating toward VoIP even faster than consumers, with 
as many as one in 10 business calls that once traveled over the traditional 
voice network taking place completely over the Internet.

Analysts expect significant growth in the sector for the next five years, 
especially now that Cox Communications and Comcast are committing more of 
their budgets to building up their VoIP services.

Those predictions worry state regulators, who say they fear losing tens of 
millions of dollars--from fees and subsidies provided by telephone 
companies--if more calls flow away from traditional phone networks and onto 
the Internet. States such as Minnesota and New York already are trying to 
seize authority over VoIP companies.

A tax that never dies

Congress enacted the so-called "luxury" excise tax at 1 cent a phone call 
back in 1898, when only a few thousand phone lines existed in the country. 
It was repealed in 1902, but was reimposed at 1 cent a call in 1914 to pay 
for World War I and eventually became permanent at a rate of 3 percent in 
1990.

Former House Majority Leader Dick Armey repeatedly tried to repeal the tax 
during his tenure in Congress. In May 2000, the House of Representatives 
voted 420-2 for the repeal, but the Senate never acted on the measure.

"I think there's going to be a big backlash in Congress if they try to do 
this," said Armey, who is now chairman of the conservative group Citizens 
for a Sound Economy. "I don't think anybody could have legislated an 
application of the (Spanish-American War) surcharge to VoIP, and I don't 
think that Congress will allow the IRS to do it by fiat."

Tom Readmond, federal affairs manager for Americans for Tax Reform, said 
his group "has not yet weighed in, but obviously we would oppose extending 
telephone excise taxes to VoIP." The group asks politicians to sign a 
no-new-taxes pledge and has lobbied against Internet sales taxes in the 
past.

VoIP companies panned the IRS-Treasury notice.

"What they see is huge revenues, and whenever there's huge revenue, they 
are looking to tax," said Jeff Pulver, founder of Free World Dialup. He 
said that "even if it's decided the IRS can do what they want to, they 
should choose not to enforce it" and follow the hands-off approach 
recommended by Michael Powell, chairman of the Federal Communications 
Commission.

VoIP provider AT&T, which launched its CallVantage service 14 weeks ago, 
argued that VoIP "shouldn't be burdened by costs that would stifle its 
growth." The company is, however, willing to "comply with any applicable 
taxes," said spokesman Tom Hopkins.

Current law permits the IRS to levy 3 percent taxes on "communications 
services," which include local telephone service, toll telephone service 
and any "teletypewriter exchange service." Last Friday's notice says 
"questions have arisen concerning the application of (that law) to certain 
communications services that were not available" when the law was revised 
in 1965.

The IRS and Treasury Department notice, called an advance notice of 
proposed rulemaking, asks for comments from the public no later than Sept. 
30. Bradshaw, the IRS spokeswoman, said "we're requesting the comments so 
we know what issues to look at."

CNET News.com's Ben Charny contributed to this report.

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