Vonage 2008 Annual Report Download - page 28

t
he uncertainty surrounding litigation and our inability to assess
t
he likelihood of a favorable or unfavorable outcome in the abov
e
n
oted matters, it is
p
ossible that the resolution of one or more o
f
t
h
ese
m
a
tt
e
r
s cou
l
d
h
a
v
ea
m
a
t
e
ri
a
l
ad
v
e
r
se effec
t
o
n
ou
r
co
n-
s
olidated financial
p
osition, cash flows or results of o
p
erations.
R
egu
l
at
i
o
n
Telephony services are subject to a broad spectrum of state
and federal re
g
ulations. Because of the uncertainty over whethe
r
VoIP should be treated as a telecommunications or in
f
ormatio
n
s
ervice
,
we have been involved in a substantial amount of state
and federal re
g
ulatory activity. Implementation and interpretation
o
f
the existing laws and regulations is ongoing and is subject t
o
l
itigation by various federal and state agencies and courts. Due t
o
t
he uncertainty over the re
g
ulatory classification of VoIP service
,
t
here can be no assurance that we will not be subject to ne
w
r
egu
l
at
i
ons or ex
i
st
i
ng regu
l
at
i
ons un
d
er new
i
nterpretat
i
ons, an
d
th
at suc
h
c
h
an
g
e wou
ld
not
i
ntro
d
uce mater
i
a
l
a
ddi
t
i
ona
l
costs t
o
our business
.
Federal –
C
ALEA
On August 5, 2005, the FCC released an Order extending th
e
obli
g
ations of
C
ommunications Assistance for Law Enforcemen
t
A
ct (“CALEA”) to interconnected VoIP providers. Under CALEA,
t
elecommunications carriers must assist law en
f
orcement i
n
executin
g
electronic surveillance, which include the capability o
f
p
rovidin
g
call content and call-identi
f
yin
g
in
f
ormation to a local
en
f
orcement agency, or LEA, pursuant to a court order or other
la
wf
u
l
au
th
o
riz
a
ti
o
n.
The FCC required all interconnected VoIP providers t
o
b
ecome full
y
CALEA compliant b
y
Ma
y
14, 2007. To date, w
e
h
ave taken significant steps towards
C
ALEA compliance, whic
h
i
nclude testin
g
a CALEA solution with the FBI and deliverin
g
law-
f
ul CALEA requests. We have also implemented alternative sol-
u
tions that allow
C
ALEA access to call content and call-identifying
i
nformation. The FCC and law enforcement officials have bee
n
advised as to our CALEA progress and our efforts at implement
-
i
ng alternative solutions. We could be subject to an enforcement
action b
y
the F
CC
if our
C
ALEA solution is deemed not full
y
operational.
S
tate Telecommunications Regulation
I
n general, the focus of interconnected VoIP tele-
communications re
g
ulation is at the federal level.
On
November 12, 2004, the FCC declared that our service is subjec
t
t
o federal regulation and preempted the Minnesota Public Utilitie
s
C
ommission, or MPU
C
, from imposin
g
certain of its re
g
ulation
s
on us. The FCC’s decision was based on its conclusion that our
s
ervice is interstate in nature and cannot be se
p
arated into inter
-
s
tate and intrastate com
p
onents.
O
n March 21, 2007, the Unite
d
States Court of Appeals for the
8
th
Circuit affirmed the FCC’
s
declaratory ruling preempting state regulation of Vonage’s serv-
ice
.
The 8
t
h
C
ircuit found that it is impossible for Vona
g
e to sepa
-
ra
t
e
it
s
int
e
r
s
t
a
t
e
tr
aff
i
cf
r
o
mit
s
intr
as
t
a
t
e
tr
aff
i
c because of
th
e
n
omadic nature of the service. As a result
,
the
8
th
C
ircuit held that
it was reasonable for the F
CC
to preempt state re
g
ulation o
f
V
ona
g
e’s service. The 8
th
Circuit was clear
,
however
,
that the
p
reemptive effect of the F
CC
’s declaratory ruling may be
reexamined if technolo
g
ical advances allow for the separation of
i
nterstate and intrastate components o
f
the nomadic VoIP service
.
T
herefore, the preemption of state authority over Vonage’s servic
e
hi
n
g
es on t
h
e
i
na
bili
ty to separate t
h
e
i
nterstate an
di
ntrastate
c
omponents o
f
the service
.
W
hile this ruling does not exempt us from all state oversigh
t
o
f our service, it effectivel
y
prevents state telecommunication
s
regulators
f
rom imposing certain burdensome and inconsistent
mar
k
et entry requ
i
rements an
d
certa
i
not
h
er state ut
ili
ty ru
l
es an
d
re
g
ulations on our service.
S
tate re
g
ulators continue to probe th
e
l
imits o
ff
ederal preemption in their attempts to appl
y
state tele
-
c
ommun
i
cat
i
ons regu
l
at
i
on to
i
nterconnecte
dV
o
IP
serv
i
ce.
The
Nebraska Public
S
ervice
C
ommission and New Mexico Public
Regulatory Commission cases, discussed above under the Liti-
g
ation section to this note, are examples of state public utility
c
omm
i
ss
i
on attempts to exten
d
tra
di
t
i
ona
l
state te
l
e
-
c
ommunications regulation to our service. In these cases, th
e
s
tate public utility commissions are seeking to apply state univer-
s
al service fundin
g
requirements to Vona
g
e. Kansas has als
o
d
etermined that the
y
have jurisdiction to seek state universal serv
-
i
ce funding from interconnected VoIP providers.
S
imilarly, th
e
Public Utility
C
ommission of
O
hio has adopted rules that would
a
ppl
y
state fees for Telephone Rela
y
Service to interconnecte
d
V
oIP service. We expect that state public utility commissions and
s
tate
l
e
gi
s
l
ators w
ill
cont
i
nue t
h
e
i
r attempts to app
l
y state te
l
e
-
c
ommunications re
g
ulations to interconnected VoIP service
.
S
tate and Munici
p
al Taxe
s
For a period o
f
time, we did not collect or remit state or
munici
p
al taxes
(
such as sales, excise, and ad valorem taxes
)
,
fees or surchar
g
es
(
“Taxes”
)
on the char
g
es to our customers fo
r
o
ur services, except that we have historicall
y
complied with th
e
New Jersey sales tax. We have received inquiries or demand
s
from a number of state and municipal taxin
g
and 911 a
g
encie
s
s
eekin
g
payment o
f
Taxes that are applied to or collected
f
ro
m
c
ustomers o
fp
roviders o
f
traditional
p
ublic switched tele
p
hon
e
networ
k
serv
i
ces.
Al
t
h
ou
gh
we
h
ave cons
i
stent
l
yma
i
nta
i
ne
d
t
h
at
these Taxes do not appl
y
to our service
f
or a variet
y
o
f
reason
s
d
epending on the statute or rule that establishes such obligations,
a
number of states have chan
g
ed their statutes as part of stream-
l
ined sales tax initiatives and we are now collectin
g
and remittin
g
s
ales taxes in those states. In addition
,
a
f
ew states address ho
w
V
oIP providers should contribute to support public safety a
g
en-
c
ies, and in those states we be
g
an to remit
f
ees to the appropriat
e
s
tate agencies. We have also contacted authorities in each o
f
the
o
ther states to discuss how we can financially contribute to th
e
9
11 s
y
stem. We do not know how all these discussions will b
e
resolved, but there is a possibility that we will be required to pa
y
o
r
co
ll
ec
t
a
n
d
r
e
mit
so
m
eo
r
a
ll
o
fth
ese
T
a
x
es
in th
e
f
u
t
u
r
e
.A
dd
i-
tionall
y
, some o
f
these Taxes could appl
y
to us retroactivel
y
.As
s
uch
,
we have a reserve of
$
2
,
915 at December 31
,
2008 as ou
r
b
est estimate of the potential tax exposure for any retroactiv
e
a
ssessment. We believe the maximum estimated exposure
f
o
r
retroactive assessments is
$
12
,
056 as of December 31
,
2008
.
20
VO
NA
G
E ANN
U
AL REP
O
RT 2008