Thursday, March 31, 2005 - The Progress & Freedom Foundation Blog

Taxation by Regulation: No Escape

Nebraska and Arkansas this week follow "taxation by regulation" to its logical ends by affirming the respective states' rights to tax Voice over Internet Protocol (VoIP). The Nebraska PSC, with a display of not inconsiderable regulatory will, concludes that is possesses the authority to tax VoIP for purposes of its state universal service fund. Meanwhile, the March 29 Communications Daily (subscription required) reports that the Arkansas legislature moved to "to ensure that VoIP and other types of non-traditional telecom services are subject to Ark.'s telecom gross receipts tax."

The Nebraska PSC action is the more interesting of the two, but both are of a piece. Both actions demonstrate the internal logic of the current universal service system that cannot abide any exit from the taxble "telecommunications" category. Thus, the Nebraska PSC endeavors -- in the face of the FCC's Vonage Order -- to conclude that VoIP services can be taxed for state universal service purposes. Surprise, surprise, the PSC concludes it gets to tax VoIP as telecommunications, based in part on the FCC's ducking of the matter in the Vonage Order. Universal service policy abhors a regulatory definitional vacuum -- and the states will fill in where the FCC gives room.

Those who deplore "arbtirage" and cast any regulatory decision that keeps VoIP less-regulated than traditional wireline services will applaud the parity that these state actions embody. After all, by making VoIP subject to these state taxes, it is just ensuring a "level playing field."

I don't blame the states for these moves; nor do I deplore the attempt to "tax up" all technologies equal. Universal service cannot admit escape, or it quickly fails. [Getting Skype to pay its taxes will introduce an interesting multi-jurisdictional challenge though.] But it is interesting that this is all that is left of regulation: protecting subsidy flows.

This is the way regulation ends: not to solve the monopoly problem, but to continue the subsidy flow.

posted by Ray Gifford @ 11:12 PM | Universal Service , VoIP