2013 Fall Newsletter

LEGAL TRENDS

Published in Fair and Equitable magazine - August 2013

Internet Telephone Service and Central Assessment An Arizona cable company that provided telephone service to its customers through Voice over Internet Protocol (VoIP) technology was a telecommunications company subject to central assess- ment, the state appellate court has ruled. This ruling over– turned a tax court decision that held the company was not a telecommunications company because it did not operate traditional telephone lines. Previously, the company had been assessed as a cable television service provider at the local level. The change to central assessment, the company estimated, would increase its property tax liability five- fold. Statutory Definition According to Arizona statutes, a telecommunications company can be identified by two criteria: (1) it "owns telecommunications transmission facilities," and (2) it provides "public telephone ... ex- change or inter– exchange access for compensation." The statute does not specify particular technolo- gies that must be used. The company operates itsVoIPservice over the same cable network as its television programming and broad– band Internet services. Calls between local VoIP subscribers travel as digital packets via the company's broadband Internet. Calls to nonsubscribers and calls to other cities, even if they are within a company service area, must travel over traditional telephone wires (the public switched tele- phone network or PSTN) . The company routes these calls to its facilities known as headends for transfer to the PSTN. The PSTN services, however, are contracted from a third party. The company argued that itsVoIP offering was an "Internet protocol enabled service,'' not telephone service. As support for this claim, the company pointed out that its cable broadband network was not part of the PSTN and that any needed telephone transmission serviceswere provided by a third party. The only telecommunications company in this process, the cable company suggested was its PSTN supplier.

Court's Application The appellate court was not persuaded. The statute de- fines a telecommunications company by function (owning telecommunications facilities) and product (exchange and inter-ex– change service or, more collo- quially, local and long-distance calling) , the court said. The cable company met both criteria. First, the company's broadband net– works that carry customer calls and the headend operations that re- ceive them for transfer to the PSTN are serving the function of transmitting telecommunications, the court said. Therefore, the company owns telecommuni- (Continued on page 12)

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Fall 2013 Newsletter of the FCIAAO