8x8 2006 Annual Report Download - page 25

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services provider and not a telecommunications provider. The letter from the CPUC did not indicate, and we cannot
predict, what any potential penalties or consequences in failing to obtain certification might be. If we are subjected
to penalties, or if we are required to comply with CPUC regulations affecting telecommunications service providers,
our business may be adversely affected. On November 13, 2003, the CPUC held a hearing in San Francisco to hear
testimony from CPUC staff and industry representatives regarding what course of action the CPUC should take with
respect to Internet telephony. A representative from 8x8 testified at the hearing. On February 11, 2004, the CPUC
stated that, as a tentative conclusion of law, they believe that VoIP providers are telecommunications providers and
should be treated as such from a regulatory standpoint. The CPUC initiated an investigation into appropriate
regulation of VoIP providers under state law, and acknowledged that it has not enforced the same regulatory regime
over VoIP as applies to telecommunications services. The CPUC is considering a number of potential regulatory
requirements, including contribution to state universal service programs, provisioning of 911 services, payment of
access charges to interconnect with the PSTN and compliance with NANP protocols and basic consumer protection
laws, including California's telecommunications "bill of rights." The CPUC is also considering whether exempting
VoIP providers from requirements applicable to traditional providers of voice telephony creates unfair competitive
advantages that should be proactively addressed, if the regulatory framework governing the provision of VoIP
should vary based on the market served and whether VoIP providers should be subject to the current system of
intercompany compensation arrangements. The CPUC has indicated that this process could last up to 18 months, but
there is no way for us to predict the timetable or outcome of this process. 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, or 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. In May 2006, the administrative law judge, or ALJ, presiding over the CPUC VoIP proceeding
released a draft decision closing the proceeding. Since the FCC has preempted states from regulating VoIP
services, the ALJ reasoned that it would be premature for the CPUC to consider a VoIP regulatory framework.
In May 2004, in response to a 2003 complaint case brought by Frontier Telephone of Rochester against Vonage, the
New York State Public Service Commission, or NYPSC, concluded that Vonage is a telephone corporation as
defined by New York law and must obtain a Certificate of Public Convenience and Necessity, which represents the
authorization of the NYPSC to provide telephone service in New York. The NYPSC will allow a forty- five day
period in which Vonage can identify and seek waivers of any rules that it believes should not apply. Vonage will be
required to provide 911 service in some form, and will be required to file a schedule of its rates. Currently, this
decision applies only to Vonage. In June 2004, a federal judge issued a preliminary injunction enjoining the NYPSC
from regulating Vonage as a telecommunications carrier. Vonage has asked the federal district court to make this a
permanent injunction, and this request is being considered. While this ruling applies only to Vonage and not to us, if
we are subject to regulation by the NYPSC, we may become subject to liabilities and may incur expenses that
adversely affect our results of operations.
In July 2004, we received a letter from the Arizona Corporation Commission, or ACC, stating that it was conducting
a competitive analysis of the various telecommunications markets in Arizona. The letter requested that we provide
answers to a listing of questions as well as certain data. On August 26, 2004, after executing the ACC's standard
protective agreement governing the submission of commercially sensitive information, we sent to the ACC answers
to some of the questions posed in the initial letter, together with information responsive to certain of the data
requests. Inasmuch as the ACC proceeding is a generic docket opened for the purpose of gathering information
regarding VoIP, additional information requests are possible, but none has been received to date.
In late 2004 and early 2005, we 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 we begin
collecting and remitting utility user taxes no later than January 1, 2005. We have responded to these municipalities
and disputed their assertions.
In January 2005, we received a letter from an association representing multiple municipalities in South Carolina
asserting that we are subject to a business license tax applied to telecommunications companies. We have
responded to this association and disputed their assertion.
In May 2005, we received a notice from the City of Chicago that we were being investigated for non-compliance
with Chicago tax laws as we are not collecting and remitting Chicago’s Telecommunications Tax. We completed
the questionnaire received and disputed the applicability of this tax to the Packet8 service.