8x8 2009 Annual Report Download - page 21

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Regulation may be targeted towards, among other things, assessing access or settlement charges, imposing taxes related to
Internet communications and imposing tariffs or regulations based on encryption concerns or the characteristics and quality of
products and services, any of which could restrict our business or increase our cost of doing business. The increasing growth of
the broadband IP telephony market and popularity of broadband IP telephony products and services heighten the risk that
governments or other legislative bodies will seek to regulate broadband IP telephony and the Internet. In addition, large,
established telecommunication companies may devote substantial lobbying efforts to influence the regulation of the broadband
IP telephony market, which may be contrary to our interests.
Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC and other
state and local regulatory agencies. On February 12, 2004, the FCC initiated a notice of public rule-making to update FCC
policy and consider the appropriate regulatory classification for VoIP and other IP enabled services. On November 9, 2004, the
FCC ruled that Vonage DigitalVoice and similar services are jurisdictionally interstate and not subject to state certification,
tariffing and other common carrier regulations. This ruling was subsequently appealed by several states. On March 21, 2007,
the United States Court of Appeals for the Eighth Circuit affirmed the FCC’ s declaratory ruling.
There is risk that a regulatory agency will require us to conform to rules that are unsuitable for IP communications technologies
or rules that cannot be complied with due to the nature and efficiencies of IP routing, or are unnecessary or unreasonable in
light of the manner in which 8x8 offers service to its customers. It is not possible to separate the Internet, or any service offered
over it, into intrastate and interstate components as we currently have no means to automatically identify the physical location
of one of our subscribers on the Internet. While suitable alternatives may be developed in the future, the current IP network
does not enable us to identify the geographic nature of the traffic traversing the Internet, or dynamically pinpoint or update the
location of our customers’ telephony devices. In the United States, the FCC as well as our competitors have made statements
in the past suggesting that we should be required to automatically determine the physical location of our customers’ equipment
as a precondition for offering telecommunications services to them.
Internet service providers might restrict our ability to provide VoIP telephony services in the future.
It is not clear whether suppliers of broadband Internet access have a legal obligation to allow their customers to access and use
our service without interference. As a result of recent decisions by the U.S. Supreme Court and the FCC, providers of
broadband services are subject to relatively light regulation by the FCC. Consequently, federal and state regulators might not
prohibit broadband providers from limiting their customers’ access to VoIP applications and services, or otherwise
discriminating against VoIP providers. Conceivably, some providers of broadband access may take measures that affect their
customers’ ability to use our service, such as degrading the quality of the data packets we transmit over their lines, giving those
packets lower priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge
their customers more for also using our services. Interference with our service or higher charges for also using our service
could cause us to lose existing customers, impair our ability to attract new customers and harm our revenue and growth. These
problems have arisen in the past in the United States and in certain international markets.
Taxes will increase our customers' cost of using our service and we may be subject to liabilities for past sales and
additional taxes, surcharges and fees.
Until 2007, we did not collect or remit state or municipal taxes, such as sales, excise, and ad valorem taxes, fees or surcharges
on the charges to our customers for our services, except that we have historically complied with the collection of 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, fees or surcharges 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, fees or surcharges 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 streamlined sales tax
initiatives and we are now collecting and remitting sales taxes in those states. The collection of these taxes, fees or surcharges
will have the effect of decreasing any price advantage we may have over other providers who have historically paid these taxes
and fees. Our compliance with these tax initiatives will also make us less competitive with those competitors who choose not to
comply with these tax initiatives. Additionally, we are currently being audited by two states for state and municipal taxes. We
have established an accrued tax liability of $0.2 million as of March 31, 2009, to account for the claims by some states that we
should have collected and remitted sales taxes in the past. If our ultimate liability exceeds that amount, it could result in
significant charges to our earnings.