In the sometimes-heated discussion over the impact of the decline of traditional voice services there are two sides: providers and regulators. They are both serving the consumer’s best interest, but from different perspectives.

Consumer demand and industry competition are driving major change as preferred communication methods have shifted to more data-heavy options. This evolution has forever changed the wireless service bundle, which over time is creating major communications tax implications as traditional, interconnected voice—the most highly taxed component—is squeezed out.

As wireless providers continue to keep pace with technology changes and consumer demand, while regulators continue to lag behind, questions loom which could leave lasting industry impact.

• How do we continue to fund essential voice services for those who need and want them?
• How do providers remain competitive in such a tight market?
• Will legislatures enact dramatic change?

   

And ultimately, are we looking “the death of voice” straight in the eye yet?

How did we get here?

There was once a time when communications bundles were based on usage—a certain number of minutes or text messages allowed per month. At that time, volume drove the price of the plans. Then arrived the day of “unlimited” plans, with no cap on minutes or SMS texts. We’re now in a post-unlimited world. Carriers pick and choose what goes in the bundle based on what people will pay for, forcing carriers to adapt their business model or risk losing to competition. Adding to this pressure, consumers are no longer as interested in voice or SMS services as they once were. Carriers must now contend with competition from non-interconnected IP (free and ad-supported) voice services not subject to communications regulations—such as WhatsApp, Skype, Facebook, and other over-the-top (OTT) services that provide the same functionality.

Many might see this as good news—a free market working at its finest to get consumers the best deal. But to understand where the challenges begin, it’s worth taking a step back to look at the big picture. The Communications Act of 1934 established the FCC based on the principle that all Americans should have access to basic communications services, known as Universal Service. This enabled telephone service even in remote, rural areas though funding provided by taxes paid by telecom service providers, known as the Universal Service Fund (USF). But with decreasing revenue from voice users as preferred communications methods shift, the responsibility for carrying the burden of universal service funding lies with fewer businesses. The more commonly used OTT services contribute nothing at all to funding universal service.  The issue is not limited to just universal service, Internet Service Providers (ISPs) are not subject to communications tax in most states. Currently, ISPs  are safeguarded from it by the Internet Tax Freedom Act (ITFA 1998) and the Permanent Internet Tax Freedom Act (PITFA 2015).

What does this mean for the future?

On the policy side, this situation has sparked great debate among regulators as well as traditional players still carrying the weight communication taxes and fees, opening the door to the possible end of PITFA. At the industry level, competition is heating up more than ever. Bundled offerings were once relatively stable, evaluated maybe a few times a year for updates. Now carriers are investing in at least monthly re-evaluations if not more frequent—adjusting bundles to shave off any piece of highly taxed voice or data component that will boost their margins. We’re likely to start seeing carriers develop their own apps to compete with other non-regulated IP apps that consumers are drawn to. It’s very likely we’ll start seeing phones sold with a pure data subscription—no voice component at all. As it is, many people are already finding ways to use their phones solely connected via Wi-Fi, so it’s only a matter of time before the industry responds.

As competition in the wireless market increases amidst rapid technology advancement, expect big changes on the horizon. Much like the shifts that occurred when commercial phone systems were gradually replaced with VoIP systems, communications tax regulators will look to make changes to capture lost revenue. And traditional communications providers will be racing to adopt new business models to compete with emerging technologies. To stay competitive, they’ll need to be equipped to continuously evaluate and adjust bundle offerings to reflect where consumers are headed and understand the communications tax implications of those changes. Is this the death of voice? Maybe—at least as we know it today.

Toby Bargar is a Senior Tax Consultant at Avalara. As part of Avalara’s Communications Business Unit, he has spent the last twelve years assisting clients with their complex transaction tax issues, particularly in the field of communications tax and regulatory cost surcharges. In addition to consulting on challenging client-specific tax questions, Mr. Bargar assists in the training and set up of tax departments, the implementation and management of tax systems and is a frequent speaker on transaction tax and regulatory issues. Mr. Bargar holds a Bachelor of Sciences degree from William Jewell College and a Juris Doctorate from the University of Kansas School of Law. Mr. Bargar is admitted to the practice of Law before the Supreme Court of Kansas. Mr. Bargar is a member of tax organizations such as the Institute of Professionals in Tax and the Broadband Tax Institute.