Wider impact for tax ruling?

After decision for city, Vonage might face similar cases

April 18, 2008|By Tricia Bishop | Tricia Bishop,SUN REPORTER

A federal court ruling this week allowing Baltimore to tax an Internet phone company could push other jurisdictions to consider similar fees, a city attorney and industry lobbyist said yesterday.

On Wednesday, U.S. District Judge J. Frederick Motz issued an opinion that said Vonage Inc., which provides Voice over Internet Protocol -- VoIP -- telephone services, must pay Baltimore City's monthly telecommunications tax of $3.50 per customer line like every other phone service business.

VoIP converts the voice signal from a telephone into digital data that is delivered using the Internet. Vonage had argued that it was exempt from the four-year-old city tax because it's an "information services" company rather than a telecommunications one.

It is a position that has been accepted in court before. Last month, a Nebraska federal judge sided with Vonage in exempting it from a state fee. And several years ago, a Minnesota court accepted the argument and ruled that Vonage was not subject to state regulation.

But Motz concluded that Vonage service "includes the use of a `telecommunication line'" and therefore is subject to the city tax, which was implemented in 2004 to help boost the Baltimore budget. It generated about $26.2 million in its first year. Verizon and Comcast voluntarily pay the tax on their VoIP services, the city said.

The Federal Communications Commission has been reluctant to categorize VoIP as a data service or a telecommunications service as well as to regulate it. Thus far, the agency has only required VoIP providers to comply with 911 access rules, protect customer information, allow number portability and contribute to a federal fund.

Such businesses aren't subject to the same rules as traditional telephone companies, which are governed by state regulators. Maryland passed a law last year to make sure they never would be: It specifically excused VoIP companies from Public Service Commission oversight.

And while taxes are not the same as regulation, VoIP representatives worry about a perceived association, analysts said.

In a statement yesterday, Vonage spokesman Michael Zema said the New Jersey company was disappointed by the Baltimore ruling and reviewing its legal options.

"Vonage is committed to providing low-cost service to Maryland consumers and Baltimore City customers," Zema wrote. "The $3.50 tax imposed by Baltimore City frustrates that purpose."

A year ago, Vonage, which has never turned a profit, said it was facing bankruptcy after it lost an infringement trial to Verizon Communications Inc. and a judge ordered it to stop most operations. Vonage settled the case in October after an appeals court upheld most of the verdict.

The company declined to disclose the number of customers it has in Maryland or Baltimore, though its Web site says it has 2.5 million subscriber lines nationwide. That's about 0.6 percent of the voice market, said Jim Kohlenberger, executive director of VoIP trade group the VON Coalition.

"Baltimore probably spent more on legal fees than they might recover in the short run," Kohlenberger said.

If Vonage appeals, the case "will become a matter of national attention," said Baltimore attorney David E. Ralph, who represented the city against Vonage. "If Vonage loses that appeal, then conceivably other municipalities and jurisdictions across the United States where Vonage provides this service would probably seek to collect a similar tax."

Vermont lobbyist and economist Scott Mackey said most telephone tax laws are too old and outdated to apply to VoIP providers, making it unlikely that a mass effort to tax them would ensue. But newer ordinances, such as Baltimore's and one in Montgomery County, both of which also apply to wireless carriers, have a modern flexibility built in.

Still, Mackey, a consultant for the wireless industry, expects the ruling to grab some attention.

"As local jurisdictions are facing issues with their property tax base, ... they're going to be looking at all kinds of ways to try to raise money, and if they hear that Baltimore found this wonderful revenue source, I think they would be tempted to perhaps try to do the same thing," Mackey said.

tricia.bishop@baltsun.com

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