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FCC�s Order Requires VoIP Providers to Contribute to the Universal Service Funds

By Jacob Farber

October 2006, Volume 9/ Number 10


In an order released June 27, 2006, the Federal Communications Commission required providers of certain VoIP services to contribute for the first time to the universal service funds (USF). As of August 1, 2006, �interconnected VoIP providers� (IVPs) must pay a USF contribution based on a percentage (currently 10.5%) of their revenue from interstate and international telecommunications.

While the FCC�s decision has been widely reported, there are some aspects of the ruling that have not received the attention they deserve.

The contribution requirement applies only to �interconnected VoIP� providers.

Not all VoIP providers are affected by the FCC�s decision. The FCC�s imposition of USF contributions only on IVPs excludes some significant categories of VoIP. The FCC defines interconnected VoIP as a service that (1) enables real-time, two-way voice communications, (2) over a broadband connection, (3) requires a terminal adapter or other IP-compatible user hardware, and (4) allows users to both make and receive calls to and from the public switched telephone network (PSTN).

That last element of the definition is critical. It excludes �computer-to-computer� VoIP services that do not allow calls to the PSTN. In a Q&A session at the FCC meeting adopting the order, a senior FCC official offered Skype (News - Alert) as an example of services that fall outside the definition of interconnected VoIP. While FCC staff opinions are not binding on the agency, that interpretation seems to be correct.

It is important to distinguish, however, plain vanilla Skype with offerings such as SkypeOut and SkypeIn. Those types of services arguably fall within the definition of interconnected VoIP, as they offer the capability to make calls to and from the PSTN. This, however, is something of a murky area. Since interconnected VoIP must also be �two-way,� some observers have interpreted the definition to require two-way communication with the PSTN. If that is the case, then services that permit only calls to or from the PSTN, but not both, might fall outside of the definition of interconnected VoIP. Presumably, the FCC will, at some point, have to clarify this aspect of its definition.

What is clear is the sweeping nature of the contribution obligation imposed by the FCC. As the FCC emphasized, a service need only �offer the capability for users to receive calls from and terminate calls to the PSTN� in order to be considered an interconnected VoIP service. The FCC went on to say that once a subject is classified as interconnected VoIP, the contribution requirement applies to all VoIP communications made using the service, �even those that do not involve the PSTN.� This could have important implications for how VoIP providers structure their offerings.

Providers that contribute based on actual revenues risk becoming subject to state regulation.

The FCC recognized that, because of the nature of VoIP traffic, it may be difficult for IVPs to determine whether a particular call is an interstate or international call subject to USF contribution. Accordingly, the FCC created a so-called �safe harbor,� whereby providers can assume that 64.9% of their traffic is interstate/international and pay on that basis.

As an alternative to the safe harbor, providers that are able to determine the nature of their traffic may contribute based on their actual revenue from interstate/international traffic. IVPs can also opt to base their contributions on traffic studies that look at a sampling of their actual traffic, although any provider wishing to do so must have its methodology pre-approved by the FCC.

The option to pay based on actual revenues or traffic studies, however, has a huge downside. The FCC said that providers that choose to report actual revenue �would no longer qualify for the preemptive effects of our Vonage (News - Alert) Order and would be subject to state regulation.� You may recall that the supposed inability of VoIP providers to determine the nature of their traffic was one of the major reasons that the FCC held that VoIP was an interstate service in its 2004 Vonage Order. As a result of that determination, IVPs are subject to the FCC�s exclusive jurisdiction and, thus, are exempt from state regulation. Now, however, it appears that an IVP that reports actual revenue to the FCC will lose the benefit of that ruling. This major development, mentioned almost in passing by the FCC, is very controversial and is likely to be challenged in court.

Not all interstate/international VoIP revenue is subject to contribution.

In some cases, not all of a provider�s interstate/international revenue is subject to contribution. The contribution requirement only applies to interstate/international �telecommunications� revenue, which means basically revenue from the transmission of calls. For providers that bundle their calling service with hardware or additional enhanced features such as unified messaging, contribution is only required on the �telecommunications� portion of their offerings. While there is a lot of ambiguity in the order, and there is still a lot to be sorted out, it appears that a provider utilizing the safe harbor could potentially pay USF on something less than 64.9% of its revenue by allocating some of it to the non-telecommunications component of its offering. IVPs should, however, proceed cautiously. The FCC made clear that a provider that pursues such a strategy will have to be prepared to defend its allocation in the face of an FCC audit. It may well be that the savings associated with such an allocation do not justify the risk. IT

Jacob Farber is a counsel in the Communications Practice at Dickstein Shapiro LLP. He can be reached at [email protected] or 202-420-2290. Dickstein Shapiro represents the Enterprise Communications (News - Alert) Association ( For more information on Dickstein Shapiro, please visit the firm online at

This article does not constitute, nor should it be relied upon as, legal advice. If you have any questions about how the issues discussed in this article may affect your particular company, you should consult an attorney.

If you are interested in purchasing reprints of this article (in either print or PDF format), please visit Reprint Management Services online at or contact a representative via e-mail at [email protected] or by phone at 800-290-5460.

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