Voice Over Internet Protocol (VOIP) is the fastest-growing market in the United States. VOIP technology provides telephone-like service without the restrictions of telecommunication regulations. State governments fear that more calls traveling over Internet protocol (IP) enabled phone services will impact on the heavily-taxed fixed line phone service, which means less tax revenue to support crucial public services. However, states are struggling with how to tax VOIP services and reduce the impact of VOIP development. In this paper, we build a system dynamics model to gain insight into interactions between the VOIP market, traditional phone market, and tax policy. Two tax policy tests reviewed in this paper show tax policy does not significantly affect market competition. In addition, we show government is able to collect sufficient funds when applying new tax policy. We believe the model can help policy makers find a better way to collect maximum tax revenue with less impact on the market.