8x8 2007 Annual Report Download - page 66

Legal Proceedings
The Company from time to time is involved in various legal claims or litigation, including patent infringement claims that have
arisen in the normal course of the Company’s operations. Pending or future litigation could be costly, could cause the diversion
of management’s attention and could upon resolution, have a material adverse effect on the Company’s business, results of
operations, financial condition and cash flows.
State and Municipal Taxes
In general, the Company does not collect or remit state or municipal taxes (such as sales and use, excise, utility user, and ad
valorem taxes), fees or surcharges ("Taxes") on the charges to the Company's customers for its services. The Company does
collect and remit California sales and use tax, however. In September 2006, the Company’s largest third party network service
provider began passing through state and local E911 taxes to the Company. Beginning October 1, 2006, the Company began
collecting certain state and local E911 charges from our customers that are paid to and remitted through the third party network
service provider. The Company has received inquiries, demands or audit requests from several states and municipal taxing and
911 agencies, and is currently under audit by one state, seeking payment of Taxes that are applied to or collected from the
customers of providers of traditional public switched telephone network services. The Company has consistently maintained
that these Taxes do not apply to its service for a variety of reasons depending on the statute or rule that establishes such
obligations. The Company has recorded an expense of $841,000 and $531,000 for the years ended March 31, 2007 and 2006,
respectively as its best estimate of the probable tax exposure for such assessments. The cumulative estimate for probable
assessments is $1,570,000 as of March 31, 2007, which is recorded in other accrued liabilities line item in the consolidated
balance sheets.
Aside from Taxes, certain other fees and charges may be applicable to the Company’s offering. One state contends that
providers of interconnected VoIP services, like us, must contribute to its USF fund. The Company does not agree that such
state surcharges are applicable to its service. Should the Company become subject to state USF fees or other
telecommunications-related surcharges, the Company will likely pass such charges through to its customers. The impact of
this price increase on our customers or the Company’s inability to recoup its costs or liabilities in remitting USF contributions
or other factors 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 exposure to fees or penalties exist, 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.
Regulatory
To date VoIP communication services have been largely unregulated in the United States. Many regulatory actions are
underway or are being contemplated by federal and state authorities, including the Federal Communications Commission
(FCC), and state regulatory agencies. To date, the FCC has treated Internet service providers as information service providers.
Information service providers are currently exempt from federal and state regulations governing common carriers, including
the obligation to pay access charges and contribute to the universal service fund. The FCC is currently examining the status of
Internet service providers and the services they provide. The FCC initiated a notice of public rule-making in early 2004 to
gather public comment on the appropriate regulatory environment for IP telephony. In November 2004, the FCC ruled that the
VoIP service of a competitor and "similar" services are jurisdictionally interstate and not subject to state certification, tariffing
and other legacy telecommunication carrier regulations. The FCC ruling was appealed by several states and on March 21,
2007, the United States Court of Appeals for the 8th Circuit affirmed the FCC ruling.
Interconnected VoIP providers, like us, are required to offer 911 emergency calling capabilities similar to those available to
subscribers of traditional switched phone lines. Moreover, interconnected VoIP providers were required to distribute stickers
and labels warning customers of the limitations associated with accessing emergency services through an interconnected VoIP
service, as well as notify and to obtain affirmative acknowledgement from our customers that customers were aware of the
differences between the emergency calling capabilities offered by interconnected VoIP providers as compared to traditional,
wireline providers of telephone service. The FCC’s Enforcement Bureau released an order stating that the Enforcement Bureau
will not pursue enforcement against interconnected VoIP providers that have received affirmative acknowledgement from at
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