States Permitted to Impose USF on Nomadic VoIP: More State Regulation Expected

By Danielle Frappier, Paul B. Hudson, Michael C. Sloan, and Adam Shoemaker

On Nov. 5, 2010, the Federal Communications Commission (FCC) issued a Declaratory Ruling determining that states may assess state-level universal service fees (USFs) on nomadic interconnected voice over Internet protocol (VoIP) services on a prospective basis. This decision rolls back a portion of the FCC’s landmark 2004 Vonage Preemption Order that had pre-empted states from regulating Vonage’s nomadic interconnected VoIP service on the grounds that it was impossible to separate its interstate and intrastate components.

In 2008, based on the Vonage Preemption Order, the federal courts enjoined the Nebraska Public Service Commission from imposing state USFs on interconnected VoIP providers. The Nebraska and Kansas commissions petitioned the FCC to overturn that result, and now that it has, many of the approximately 20 states that already have USF programs are expected to impose state USFs on both nomadic and fixed interconnected VoIP providers.

Many have also argued that states are pre-empted from regulating VoIP because it is an information service. The new FCC order once again punted a decision on the classification of VoIP, although this case may now be cited by some in support of broader state regulation. Even before this FCC decision, the Maine and Vermont commissions recently declared that they had jurisdiction over fixed interconnected VoIP as a telecommunications service.

The FCC’s clarification only pertains to prospective fees, and the Commission only granted the petition after Kansas and Nebraska amended their request to exclude collection of these new USFs retroactively. Nonetheless, some states believe that they also are permitted to seek retroactive imposition, although it is unclear whether any will in fact push to do so. While it may be that a state will not purport to assess nomadic VoIP providers until issuing a subsequent order or notice to that effect, nomadic VoIP providers should immediately review USF requirements in the states where they operate to determine whether their service may already arguably be covered.

The FCC decision does prohibit states from adopting USF contribution requirements that could expose the same end-user telephone line to state USF assessment in multiple states. For example, if Kansas assessed all VoIP lines with a Kansas billing address, and Nebraska all Nebraska telephone numbers, then a consumer with a Nebraska telephone number and Kansas billing address would pay both. States assessing nomadic VoIP therefore must “have a policy against collecting universal service assessments with respect to interconnected VoIP revenue that an interconnected VoIP provider has properly allocated to another state under that state’s rules.”

Please contact your DWT attorney if you have any questions about the impact of this ruling.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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