Feature Article

Analyzing SIP''s Role in Regulatory and Tax Structures

This article originally appeared in the Nov. 2011 issue of INTERNET TELEPHONY.

SIP is an application layer protocol in the TCP/IP family of protocols. It is utilized in the establishment, modification and termination of telephony, multimedia conferencing, instant messaging and other types of real-time communication over IP-based networks. Like interconnected VoIP and other IP telephony services before it, the industry’s perception of the federal and state regulatory and tax treatment of SIP is uncertain. 

Several years ago, in its seminal Vonage (News - Alert) Order, the FCC led the way in classifying VoIP for regulatory purposes, simultaneously clarifying state taxing authority over such services. State legislatures and tax authorities acted upon the FCC’s (News - Alert) signal, and in the six years since the Vonage Order, state tax treatment of VoIP services has become nearly indistinguishable from their taxation of traditional communications services. 

The novel technology, which was VoIP, has since given way to SIP. And the industry once again finds itself asking the same questions as the title of this article: Is it taxed? Is it regulated? Back then, it was the FCC that answered the call. Today, in what some may find to be an interesting twist, it appears to be the states that are taking the lead, or at least they are in a position to do so.

A decade ago, VoIP, or anything IP, was considered untouchable by the regulators and tax authorities because of a desire to refrain from either taxing the Internet or imposing burdensome regulation on a nascent industry and promising new technological advancement. Then, in 2004, the FCC buckled, issuing orders determining that AT&T’s (News - Alert) IP-in-the-middle service was telecommunications and exercising jurisdiction over interconnected VoIP as an “inherently interstate” service. These decisions at the federal level opened the door for states to begin taxing VoIP. Since that time, states have interpreted, clarified or amended existing statutes to tax VoIP revenue.

Now, it almost goes without question that providers of VoIP or IP-based communications are subject to state communications taxes. In addition, following the FCC’s recent determination that states can assess state universal service fund contribution obligations on intrastate VoIP revenue, states are beginning to impose greater regulatory obligations on VoIP and IP-based services, including utility commission registration and compliance with state USF and TRS fund reporting and contribution requirements. 

In the same stretch of time, the industry has seen the emergence of other forms of Internet-based communications, such as SIP-based services. Today, there is the same degree of uncertainty within the industry as to the regulatory and tax treatment of SIP-based services as existed in the VoIP industry years ago. It appears that many larger providers understand or acknowledge that SIP, while a unique protocol, is by and large synonymous with VoIP; and they are treating it as such, i.e., reporting SIP as telecommunications and billing, collecting and remitting USF, regulatory fees and taxes on revenue derived from the sale of SIP-based services. On the other hand, there are many more mid-sized and smaller providers that are either blithely unaware or legitimately convinced that SIP is different than VoIP.

SIP does not fit neatly within the FCC’s definition of either “interconnected VoIP” or “telecommunications service.” The FCC’s current definition of interconnected VoIP includes the words “requires Internet protocol-compatible customer premises equipment.” This definition is narrow and may not include SIP-based services that do not include CPE or otherwise do not meet the definition of interconnected VoIP. However, while it has not adopted a formal definition of VoIP, the FCC has generally used the term to include any IP-enabled service offering real-time, multidirectional voice functionality, including, but not limited to, services that mimic traditional telephony.

It is not clear if SIP would fall outside this definition of VoIP. Even less clear is whether the FCC or the administrator of the Universal Service Fund, USAC, would tap SIP for the limited purpose of USF contributions by relying on the broad, catch-all definition of “telecommunications” set forth in Section 254 of the Communications Act. To be sure, the FCC has yet to directly address this question. But as it has demonstrated time and again in recent years, when faced with the prospect of dwindling USF support from traditional technologies or services subject to ambiguous regulatory treatment, the FCC has not shied away from taking the more expansive position. For in the FCC’s perspective, more often than not the ends (ensuring the sufficiency of the USF) justify the means.

On the other hand, taxation of SIP by the states appears far less uncertain, primarily because the underlying statutory foundation of the tax regulations in most states is much broader, which makes the conclusions clearer. Having already undergone years of legislative revision and administrative expansion following the Vonage Order, today’s state tax regulations are broadly written for the express purpose of capturing a wider array of new and even yet-to-be conceived communications technologies. In many cases, state tax definitions of the terms “telecommunications” or “communications” includes the transmission of voice or data regardless of the medium, method or protocol used. Under regulations such as these, what becomes undeniable is that if the tax applies to VoIP, it can also be applied to SIP. 

While there remains room to argue that current laws governing the regulation and taxation of telecommunications or VoIP do not apply to SIP, in particular under the FCC’s regulatory regime, the industry should take the history of VoIP regulation as its guide. VoIP providers that were the last to accept that their services were regulated and taxable as telecommunications may have incurred greater costs than their more prescient competitors. Most taxes and regulatory fees may be passed through to customers. As a result, it may be better in the long run for a provider to remit these items now and pass the cost on to its customers than to take the position that SIP is subject to different treatment than VoIP and find the company subject to taxes without the ability to recover costs. 

Jonathan S. Marashlian is a partner at Helein & Marashlian (News - Alert) LLC, The CommLaw Group (www.ComplianceAsOpportunity.com), a Washington, D.C.-area law firm specializing in federal and state telecom and technology matters. Michael P. Donahue, a senior associate at the firm, assisted in the preparation of this article.