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Text Box: BY GREGORY E. KUNKLE LAW OFFICES OF THOMAS K CROWE Spring 2005 ended with a couple of legal firsts affecting the telecommuni-cations industry. In what may prove to be a critical court case, the IRS lost its first appellate decision regarding the application of the Federal Excise Tax to certain types of toll telecommunica-tions services. Also, the FCC has taken steps to extend its regulatory reach to VoIP providers by requiring them to take initial steps to provide their cus-tomers with full-featured E9-1-1 service. Federal Excise Tax On May 10, 2005, the U.S. Court of Appeals for the Eleventh Circuit drove what some consider to be the first nail in the coffin of the IRS’s interpretation that the 3% Federal Excise Tax (FET) on toll telephone calls applies to calls billed only as a factor of elapsed call time. The decision, in the case of American Bankers Insurance Group Inc. v. U.S., reversed a lower federal court decision which had held that the FET could be assessed on charges for toll telecommunication service calculated only as a factor of elapsed call time. The FET controversy centers around a 1965 law which states that the FET applies to charges for toll telephone service based on geographic distance and elapsed call time. The IRS has been operating for some time under an interpretation of the law which would allow the agency to collect the tax on any call so long as charges were based on either geo-graphic distance or elapsed call time. Over the past few years, many end users have filed refund claims with the IRS, requesting refunds for FET amounts paid for toll telephone service

Text Box: which were assessed only as a factor of elapsed call time. Several courts have weighed in on the issue, with most ruling against the IRS’s interpretation. In fact, the American Bankers case had been the IRS’s primary victory to date. The American Bankers decision raises some interesting issues. The most immediate is that end users, especially those in the area covered by the eleventh circuit (i.e., Florida, Georgia, and Alabama) now have a much greater justification for filing a refund claim. While there are no guarantees that refund claims will ever be granted, it is anticipated that this outcome will become more likely as courts, especially those at the appellate level, continue to rule against the IRS. It is also important to recognize that at some point the mounting losses may cause the IRS to abandon its current interpretation. When that point comes is difficult to predict, but unless the IRS can secure an appellate level victory its position will grow increasingly tenuous. Some have speculated that Congress could become directly involved at some point in order to keep the FET revenue stream alive, although the FET has its own critics in Congress. On a practical note, end users in Florida, Georgia, and Alabama may want to consider discussions with their carriers regarding the legitimacy of ongoing charges for FET. Some are anticipating that carriers may incur liability from continuing efforts to bill for FET. End users may want to take this into account, with respect to both current invoicing and new contract negotiations. VoIP E9-1-1 Regulation In an Order released on May 19, 2005, the FCC took the first steps to regulate VoIP service. In what Chairman Martin described as a matter “of life or death,” the FCC acted with exceptional speed to fashion an E9-1-1

Text Box: regulation for VoIP service. Although the industry was working independently toward its own solutions, what Commissioner Abernathy characterized as “recent tragic failures of the current approach” prompted the Commission to require that carriers begin to address the issue, which involves the need for consis-tently accurate location database look-ups associated with 9-1-1 calls from customers of VoIP services. The FCC’s Order requires that interconnected VoIP service offerings include E9-1-1 service as a standard rather than an optional feature. In addition, the Order requires that providers of interconnected VoIP provide E9-1-1 services from wher-ever the customer is using the service, at home or elsewhere. While the Order acknowledges that in some circum-stances technical limitations may result in the need for VoIP users to self-report location information, the FCC is looking for input, in the form of comments to the Notice of Proposed Rulemaking, on possible technical solutions to the problem of location identification, which is particularly acute when a VoIP user physically moves his/her phone to another geographic location (NPA) and retains the original NPA and number. Comments are due to the FCC no later than 45 days after the June 29, 2005 appearance of the notice in the Federal Register. The Order gives VoIP providers 120 days from the effective date in which to comply with the new rules and promises that “swift enforcement” will be taken against any provider that fails to comply with the new regula-tions within that time frame. While the FCC did extend E9-1-1 regulation and obligations to VoIP Continued on Page 7 ò