8x8 2005 Annual Report Download - page 62

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"similar" services are jurisdictionally interstate and not subject to state certification, tariffing and other legacy
telecommunication carrier regulations. The FCC ruling has been appealed by several states and the outcome of
these appeals cannot be determined at this time. If the FCC were to determine that internet service providers, or the
services they provide, are subject to FCC regulation, including the payment of access charges and contribution to the
universal service funds, it could have a material adverse effect on the Company’s business and operating results. On
May 19, 2005, the FCC unanimously adopted an Order and NPRM that requires VoIP providers to provide
emergency 911 (E911) service. On June 3, 2005, the FCC released the text of the First Report and Order and Notice
of Proposed Rulemaking in the VoIP E911 proceeding (the VoIP E911 Order). As a result of the VoIP E911 Order,
VoIP service providers that interconnect to the PSTN, or interconnected VoIP providers, will be required to mimic
the 911 emergency calling capabilities offered by traditional landline phone companies. All interconnected VoIP
providers must deliver 911 calls to the appropriate local public safety answering point (PSAP), along with call back
number and location, where the PSAP is able to receive that information. E911 must be included in the basic service
offering; it cannot be an optional or extra feature. The PSAP delivery obligation, along with call back number and
location information must be provided regardless of whether the service is "fixed" or "nomadic." User registration of
location is permissible initially, although the FCC is committed to an advanced form of E911 that will determine
user location without user intervention, one of the topics of the further NPRM to be released eventually. The VoIP
E911 Order mandates that existing and prospective customers must be notified of the capabilities and limitations of
VoIP service with respect to emergency calling, and interconnected VoIP providers must obtain and maintain
affirmative acknowledgement from each customer that the customer has read and understood the notice of
limitations and distribute warning labels or stickers alerting consumers and other potential users of the limitations of
VoIP 911 service to each new subscriber prior to the initiation of service. In addition, an interconnected VoIP
provider must make it possible for customers to update their address (i.e., change their registered location) via at
least one option that requires no equipment other than that needed to access the VoIP service. All interconnected
VoIP providers must comply with the requirements of the VoIP E911 Order within one-hundred and twenty days of
the publication of the VoIP E911 Order in the Federal Register, which is expected by late June, with the exception
that the customer notification obligations must be complied with within thirty days of the publication. The
Company currently does not offer this service to all of its customers, as it was not available in certain rate centers
from which telephone numbers are provisioned for the Packet8 service. The Company has begun to address this
issue with its telecommunication interconnection partners. However, the Company may not be able to offer E911
service to all of its customers, and, as a result, may need to cease from offering service in certain rate centers. The
effect of this ruling could have a material adverse effect on the Company’s financial position, results of operations
and cash flows.
Several state regulatory authorities have contacted the Company regarding its Packet8 service. These inquiries have
ranged from notification that the Packet8 service should be subject to local regulation, certification and fees to broad
inquiries into the nature of the Packet8 services provided. The Company responds to the various state authorities as
inquiries are received. Based on advice of counsel, the Company disputes the assertion, among others, that the
Packet8 service should be subject to state regulation. While the Company does not believe that exposure to material
amounts of fees or penalties exists, if 8x8 is subject to an enforcement action, the Company may become subject to
liabilities and may incur expenses that adversely affect its financial position, results of operations and cash flows.
The California Public Utilities Commission (CPUC) instituted its own investigation in early 2004 to determine how
it will classify and treat VoIP service providers like Packet8. On April 7, 2005, the CPUC instituted a rulemaking to
assess and revise the regulation of all telecommunications utilities in California except for small incumbent local
exchange carriers (ILECs). The primary goal of this proceeding is to develop a uniform regulatory framework for all
telecommunications utilities, except small ILECs, to the extent that it is feasible and in the public interest to do so.
While not specifically directed at VoIP, it is unclear at this time what impact this new rulemaking will have on the
CPUCs classification or treatment of VoIP services. In late 2004 and early 2005, the Company received notices from
multiple municipalities in California that the Packet8 service is subject to utility user taxes, as defined in the
respective municipal codes. The notices require that the Company begin collecting and remitting utility user taxes
no later than January 1, 2005. After consulting with counsel, the Company responded to these municipalities and
disputed their assertions. In January 2005, the Company received a letter from an association representing multiple
municipalities in South Carolina asserting that the Company is subject to a business license tax applied to
telecommunications companies. After consulting with counsel, the Company responded and disputed the
association’s assertions.
The effect of potential future VoIP telephony laws and regulations on the Company’s operations, including, but not
limited to, Packet8, cannot be determined.