Vonage 2008 Annual Report Download - page 87

V
O
NA
G
EH
O
LDIN
GS CO
RP
.
N
O
TE
S
T
OCO
N
SO
LIDATED FINAN
C
IAL
S
TATEMENT
S
—
(C
ontinued
)
(
In thousands, except per share amounts
)
legal matters pending against Vonage.
G
iven th
e
uncerta
i
nty surroun
di
n
gli
t
ig
at
i
on an
d
our
i
na
bili
ty to assess
th
e
lik
e
lih
ood of a fa
v
o
r
ab
l
eo
r
u
n
fa
v
o
r
ab
l
eou
t
co
m
e
in th
e
above noted matters, it is
p
ossible that the resolution o
f
o
n
eo
rm
o
r
eo
fth
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
e
ff
ect on our consolidated
f
inancial position, cash
f
lows o
r
r
esults of o
p
erations.
Re
g
ulatio
n
T
elephony services are subject to a broad spectrum o
f
state and federal re
g
ulations. Because of the uncertainty
over whether VoIP should be treated as a tele-
communications or information service
,
we have bee
n
involved in a substantial amount of state and federal re
g
u-
lator
y
activit
y
. Implementation and interpretation o
f
th
e
ex
i
st
i
ng
l
aws an
d
regu
l
at
i
ons
i
s ongo
i
ng an
di
ssu
bj
ect t
o
liti
g
ation by various federal and state a
g
encies and courts
.
D
ue to the uncertainty over the regulatory classi
f
ication o
f
V
o
IP
serv
i
ce
,
t
h
ere can
b
e no assurance t
h
at we w
ill
not
be
su
bj
ect to new re
g
u
l
at
i
ons or ex
i
st
i
n
g
re
g
u
l
at
i
ons un
d
e
r
new interpretations, and that such change would no
t
i
ntro
d
uce mater
i
a
l
a
ddi
t
i
ona
l
costs to our
b
us
i
ness
.
Federal—
C
ALE
A
O
nAu
g
ust 5, 2005, the F
CC
released an
O
rder extend-
in
g
the obli
g
ations of Communications Assistance for La
w
E
nforcement Act
(
“CALEA”
)
to interconnected VoIP
p
ro
-
viders. Under
C
ALEA, telecommunications carriers must
assist law en
f
orcement in executin
g
electronic surveillance,
which include the capability o
f
providing call content and
call-identifyin
g
information to a local enforcement a
g
ency,
or LEA, pursuant to a court order or other law
f
ul
authorization
.
T
he FCC re
q
uired all interconnected VoIP
p
roviders t
o
become fully
C
ALEA compliant by May 14, 2007. To date,
we have taken si
g
nificant steps towards CALEA com-
pliance, which include testing a CALEA solution with th
e
F
BI and deliverin
g
lawful
C
ALEA requests. We have also
implemented alternative solutions that allow CALEA acces
s
t
o call content and call-identifying information. The FC
C
a
n
d
l
a
w
e
nf
o
r
ce
m
e
nt
o
ffi
c
i
a
l
s
h
a
v
e bee
n
ad
vi
sed as
t
oou
r
C
ALEA pro
g
ress and our efforts at implementin
g
alternativ
e
solutions. We could be subject to an en
f
orcement action b
y
t
he F
CC
if our
C
ALEA solution is deemed not fully
operational.
S
tate Telecommunications Regulation
In general, the
f
ocus o
f
interconnected VoIP tele-
communications regulation is at the federal level.
On
N
ovember 12, 2004, the F
CC
declared that our service i
s
subject to
f
ederal regulation and preempted the Minnesota
P
ublic Utilities
C
ommission, or MPU
C
, from imposing cer-
t
ain of its re
g
ulations on us. The F
CC
’s decision was based
on its conclusion that our service is interstate in nature and
cannot
b
ese
p
arate
di
nto
i
nterstate an
di
ntrastate com
p
o
-
nents.
O
n March 21, 2007, the United
S
tates
C
ourt o
f
Appeals
f
or the 8
th
C
ircuit affirmed the FCC’s declarator
y
ruling preempting state regulation of Vonage’s service. The
8
t
h
C
ircuit found that it is impossible for Vona
g
e to separat
e
i
ts interstate tra
ff
ic
f
rom its intrastate tra
ff
ic because o
f
the
nomadic nature of the service. As a result
,
the
8
t
h
C
ircuit
held that it was reasonable for the F
CC
to preempt state
re
g
ulation o
f
Vona
g
e’s service. The
8
th
C
ircuit was clear
,
however, that the
p
reem
p
tive effect of the F
CC
’s declara-
tory rulin
g
may be reexamined if technolo
g
ical advance
s
a
llow
f
or the separation o
f
interstate and intrastate compo
-
nents of the nomadic VoIP service. Therefore, the
p
re-
e
mption of state authority over Vona
g
e’s service hin
g
es o
n
the inabilit
y
to separate the interstate and intrastat
e
c
om
p
onents o
f
the service
.
W
hile this ruling does not exempt us from all stat
e
o
versi
g
ht of our service, it effectively prevents state tele
-
c
ommunications re
g
ulators
f
rom imposin
g
certain bur
-
d
ensome and inconsistent market entry requirements an
d
c
erta
i
not
h
er state ut
ili
ty ru
l
es an
d
re
g
u
l
at
i
ons on our serv-
i
ce. State re
g
ulators continue to probe the limits of federa
l
p
reemption in their attempts to apply state tele
-
c
ommun
i
cat
i
ons re
g
u
l
at
i
on to
i
nterconnecte
dV
o
IP
serv
i
ce.
T
he Nebraska Public Service Commission and New Mexico
Public Regulatory Commission cases, discussed above
under the Liti
g
ation section to this note, are examples of
s
tate public utilit
y
commission attempts to extend tradi
-
tional state telecommunications regulation to our service. In
t
h
ese cases, t
h
e state pu
bli
cut
ili
ty comm
i
ss
i
ons are see
k
-
i
n
g
to apply state universal service
f
undin
g
requirements to
V
onage. Kansas has also determined that they have juris-
d
iction to seek state universal service fundin
g
from inter
-
c
onnected VoIP providers. Similarl
y
, the Public Utilit
y
Commission of Ohio has adopted rules that would appl
y
s
tate fees for Telephone Relay
S
ervice to interconnecte
d
V
oIP service. We expect that state public utilit
y
commis
-
s
ions and state legislators will continue their attempts to
a
pp
l
y state te
l
ecommun
i
cat
i
ons re
g
u
l
at
i
ons to
i
nter
-
co
nn
ec
t
ed VoIP se
rv
ice.
S
tate and Municipal Taxe
s
For a
p
eriod of time, we did not collect or remit state o
r
municipal taxes (such as sales, excise, and ad valorem
taxes
)
, fees or surcharges
(
“Taxes”
)
on the charges to our
c
ustomers for our services, except that we have historically
c
omplied with the New Jerse
y
sales tax. We have receive
d
i
n
q
uiries or demands from a number of state and munici
p
a
l
taxin
g
and 911 a
g
encies seekin
g
payment of Taxes that ar
e
a
pplied to or collected
f
rom customers o
f
providers o
f
tradi
-
tional
p
ublic switched tele
p
hone network services
.
Al
t
h
ou
gh
we
h
ave cons
i
stent
l
yma
i
nta
i
ne
d
t
h
at t
h
ese
T
axes
d
o not appl
y
to our service
f
or a variet
y
o
f
reasons depend
-
i
ng on the statute or rule that establishes such obligations,
a
number of states have chan
g
ed their statutes as part o
f
th
es
tr
ea
mlin
ed sa
l
es
t
a
x initi
a
tiv
es a
n
d
w
ea
r
e
n
o
w
co
ll
ec
t
-
i
ng and remitting sales taxes in those states. In addition,
a
few states address how VoIP
p
roviders should contribute to
s
upport public sa
f
ety a
g
encies, and in those states w
e
b
egan to remit
f
ees to the appropriate state agencies. W
e
h
a
v
ea
l
so co
nt
ac
t
ed au
th
o
riti
es
in
eac
h
o
fth
eo
th
e
r
s
t
a
t
es
to discuss how we can
f
inanciall
y
contribute to the 911
F
-
27