8x8 2009 Annual Report Download - page 66

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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 the Company's customers for its services, although the Company
historically complied with the California sales tax and financial contributions to the 9-1-1 system and Universal Service Fund.
The Company has 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 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, a number of states have changed their statutes as part of
streamlined sales tax initiatives and, in response to these statutory changes, the Company has begun collecting and remitting
Taxes in those states. Some of these Taxes could apply to the Company retroactively, and two states currently are conducting
Tax audits of the Company's records. The Company has accrued a tax liability of $0.2 million at March 31, 2009 as its current
estimate of the potential tax exposure for any retroactive Tax assessment by numerous states and municipalities.
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
that the Enforcement Bureau will not pursue enforcement against interconnected VoIP providers that have received affirmative
acknowledgement from at least 90% of their subscribers. The Company has received affirmative acknowledgement from
substantially all of the Company’ s customers and has substantially satisfied this requirement of this rule.
Like many interconnected VoIP providers, the Company currently cannot offer VoIP E-911 services that route emergency calls
in a manner consistent with the FCC rules for all of the Company’ s customers. The Company is addressing this issue with its
VoIP E-911 Solution providers. On November 28, 2005, the Company began routing certain 9-1-1 calls to a national
emergency call center. The emergency dispatchers in this national call center utilize the location information provided to route
the call to the correct Public Safety Answering Point (PSAP) or first responder. The FCC may determine that the Company’ s
VoIP E-911 solution for these customers does not satisfy the requirements of the VoIP E-911 order because, in some instances,
the Company will not be able to connect its subscribers directly to a PSAP.
On August 5, 2005, the FCC unanimously adopted an order requiring interconnected VoIP providers to comply with the
Communications Assistance for Law Enforcement Act, or CALEA. CALEA requires covered providers to assist law
enforcement agencies in conducting lawfully authorized electronic surveillance. Under the FCC order, interconnected VoIP
providers were required to comply with CALEA obligations by May 14, 2007 and make certain filings prior to that date. The
Company engaged a third party to help it develop a solution to be CALEA compliant. The Company completed formal
CALEA compliance testing with this third party in March 2009 and currently, the Company’ s CALEA solution is fully
deployed in the 8x8 network. However, the Company could be subject to an enforcement action by the FCC or law
enforcement agencies for any delays related to meeting, or if the Company fails to comply with, any current or future CALEA
obligations.