Will the government ruin VoIP?

Say all you want about the benefits of convergence and extra features, but most companies and individuals will admit that the biggest attraction of switching from PSTN phone service to VoIP is the prospect of saving money -- in some cases, lots of it.

Why VoIP costs less

One reason VoIP costs less is the difference in price structuring for long-distance service. Most VoIP plans include unlimited long-distance calling, at least within the United States and Canada. Some also include unlimited calls to western European and other countries.

Even for calls to countries where you have to pay for long distance by the minute, those per-minute charges are generally considerably less than what the telcos charge. For example, international rates charged by Vonage and Lingo for calls to Australia, China, and Argentina range from 1 to 6 cents per minute. Typical charges to the same locations from AT&T and Verizon landlines cost from 11 to 20 cents per minute.

These fees are under the control of the telephone companies. However, VoIP has had another cost advantage that the telcos could do nothing about -- the difference in taxes paid on a VoIP line as opposed to those paid on a landline.

As I've noted before in this column, I have both a Lingo VoIP line and an AT&T landline at the same address. The taxes and government-imposed fees on the single landline total $13.12 per month, whereas the taxes and fees on the VoIP line total only $3.15.

Why your VoIP bill is going up

Regardless of where you live and do business, most governments have one thing in common: They never pass up an opportunity to live up to the philosophy that "anything that can be taxed will be taxed." Unfortunately for VoIP users, IP telephone service -- which was uncommon enough to stay under the radar for many years -- has now grown to the point where it has caught the government's attention as a potential revenue source.

The most recent step in that direction was the decision of a U.S. appellate court earlier this month to uphold the FCC's order that Vonage must contribute to the Universal Service Fund (USF) just like the regular telcos. This is a fund established in the 1990s to subsidize services for low-income and rural areas, schools, healthcare providers, and libraries.

Prior to the passage of the Telecommunications Act of 1996, long-distance companies had to pay into such a fund. The Telecommunications Act expanded the scope of the law so that all local phone companies, cell phone companies, paging companies, payphone providers, and interstate telecom providers must contribute. However, broadband Internet service providers and VoIP providers were still generally exempt -- until this latest ruling.

Of course, the USF is only the tip of the iceberg. This ruling opens the door to the imposition of additional taxes on VoIP services. If the federal government applies the same taxes to VoIP as to other phone services, can the state and local governments be far behind?

Your VoIP bill may soon look like your cell phone bill, where up to a quarter of your monthly payment can go to taxes and fees. In addition to the federal USF fees, these include regulatory charges, administrative surcharges, state universal service fees, E911 fees, state sales taxes, other state fees, and local sales taxes.

Will VoIP lose its biggest advantage?

If ever-increasing taxes push the cost of VoIP closer to that of the PSTN, will customers still rush to implement IP-based phone services, or will the growth in VoIP adoption slow to a crawl? Perhaps, in some market segments, VoIP will lose ground. In others, VoIP will probably continue to be an attractive alternative (or supplement) to telco service.

It's likely that, even if it becomes subject to all the same taxes as landlines and cell phones, VoIP will still offer a price advantage to businesses and consumers who make many long-distance calls, especially international calls. And VoIP has other advantages in addition to cost. VoIP makes it easy to conduct video conferences with multiple parties, and it offers unified messaging features such as the ability to get your voice mail messages as e-mail attachments -- features that are either unavailable or expensive extras with traditional phone systems.

In the consumer market, however, price is the biggest driver toward VoIP adoption. If VoIP can't offer a big price advantage, making the change may not seem worth it to most residential users. The PSTN is familiar and simple to use, and it has one important factor in its favor -- a long history of rock-solid reliability. Despite a big increase in voice quality and reliability in recent years, VoIP still has some real and perceived disadvantages:

  • More management overhead: You never have to reboot your landline, but for some users it's not an uncommon requirement to reboot the VoIP ATA box.
  • Less fault tolerance: Traditional phones keep working when the power goes out, but VoIP depends on both the electricity and the Internet connection. If either goes down, you have no phone service.
  • Inferior support for emergency services: Although the federal government has mandated that VoIP providers offer Enhanced 911 (E911) services, there are still problems with some providers not always routing emergency calls correctly or as quickly as with PSTN lines.
  • Compatibility with other technology: VoIP doesn't always work as well (or sometimes at all) with fax machines and security alarm systems.

While VoIP users are willing to live with these disadvantages because of the significant cost savings, that could change. If the price differential shrinks enough, many will prefer to stick with their landlines.


VoIP has been steadily growing in popularity, in part because of the extra features and functionality it can offer but also in large part because it costs substantially less than traditional phone service. Some of this cost savings has been due to lower taxes. If government-imposed fees and taxes increase the cost of VoIP, some customers -- especially residential and small business customers who don't make a large number of long-distance calls and don't care as much about unified messaging capabilities -- will probably forego switching to VoIP altogether.

Deb Shinder is a technology consultant, trainer, and writer who has authored a number of books on computer operating systems, networking, and security. She currently specializes in security issues and Microsoft products, and she has received Microsoft's Most Valuable Professional (MVP) status in Windows Server Security.

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