8x8 2008 Annual Report Download - page 63

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Capital leases included in office equipment were $182,000 at March 31, 2008. Total accumulated amortization was $65,000 at
March 31, 2008. Amortization expense for assets recorded under capital leases is included in depreciation expense.
Minimum Third Party Network Service Provider Commitments
In July 2006, the Company entered into a contract with one of its third party network service providers containing a minimum
monthly commitment of $400,000 effective June 1, 2006 for 24 months. At March 31 2008, the total remaining obligation
under the contract was $800,000.
Minimum Third Party Customer Support Commitments
In January 2008, the Company entered into a contract with one of its third party customer support vendors containing a
minimum monthly commitment of approximately $436,000 effective January 1, 2008 through March 31, 2009. At March 31,
2008, the total remaining obligation under the contract was $5.2 million.
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.
Subsequent to year end, in May 2008, the Company was approached by a patent holder related to potential infringement of
certain patents. The Company is still in the process of evaluating the matter and it is too early to conclude on any potential
exposure.
State and Municipal Taxes
For a period of time, the Company did not collect or remit state or municipal taxes (such as sales, excise, and ad valorem
taxes), fees or surcharges (“Taxes”) on the charges to our customers for our services, except that we have historically complied
with the California sales tax and financial contributions to the 9-1-1 system and universal service fund. We have received
inquiries or demands from a number of state and municipal taxing agencies seeking payment of Taxes that are applied to or
collected from customers of providers of traditional public switched telephone network services. Although we have
consistently maintained that these Taxes do not apply to our service for a variety of reasons depending on the statute or rule
that establishes such obligations, a number of states have changed their statutes as part of the streamlined sales tax initiatives
and we are now collecting and remitting sales taxes in those states. Additionally, some of these Taxes could apply to us
retroactively. As such, we have recorded an accrued tax liability of $2.1 million at March 31, 2008 as our best estimate of the
potential tax exposure for any retroactive assessment.
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 as well as the intercarrier compensation system including access
charges. 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
Eighth Circuit affirmed the FCC ruling.
Interconnected VoIP providers, like the Company, are required to offer 9-1-1 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 to notify and obtain affirmative acknowledgement from the Company’ s 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