Fifth Circuit Determines the USF Fee Is a Tax

Citizens Against Government Waste (CAGW) has been on the forefront in the fight against government imposed hidden taxes, which are usually called "fees." One of the most harmful examples is the Universal Service Fund (USF) fee, which has been added to telephone bills since 1997 by the Federal Communications Commission (FCC) under the Telecommunications Act of 1996. The USF provides funding for four separate programs: high-cost or Connect America funding to assist in building broadband in rural, hard to reach areas of the country; rural healthcare connectivity; schools and libraries, also known as E-Rate: and low-income support or Lifeline, which provides assistance to low-income households for either a discount for broadband or a mobile phone.

In 2014, CAGW's book Telecom Unplugged: Ushering in a New Digital Era, spotlighted problems with the funding mechanism for the USF, with its contribution factor reaching 17.4 percent in 2012, an increase of 205 percent from 2000. The USF fee is collected by the Universal Service Administrative Company (USAC), which determines the amount of increases to the USF contribution factor required to operate the fund and support its program. Since the payments are made solely from landline telephone services, the funding base has been declining and will continue to shrink as more consumers use only cellular services, which is causing the contribution factor to increase substantially. For the third quarter of 2024, the contribution factor is 34.4 percent. This is one of the many reasons the USF program is in dire need of reform.

The United States Court of Appeals for the Fifth Circuit (Fifth Circuit) rocked the telecommunications world on July 24, 2024, when it released its ruling on a challenge to the funding mechanism for the USF. This decision confirmed what CAGW has been arguing for many years. The court found that the "FCC calls this tax the USF 'contribution factor'; but we call it what it is - the 'USF Tax.'" The Fifth Circuit also calls into question the subdelegated authority the USAC was given by the FCC to increase this tax on providers, which are typically passed on to consumers.

The decision puts future USF funding into question, despite a legal advisor for FCC Chair Jessica Rosenworcel proclaiming that it does not change anything. While the case will more than likely find its way to the Supreme Court, it also highlights the importance of finding a solution to change the financing mechanism or replace the USF.

Among the proposals being floated around was to expand the contribution base for the USF fee. This proposal was spotlighted during a July 24, 2024, Broadband Breakfast webinar, which discussed how to expand the contribution base to broadband providers, edge providers like Google and Bing, e-commerce sites, and advertisers. Expansion of the funding base to edge providers is supported by Expansion of the contribution case is supported by Sen. Mark Kelly (D-Ariz.) and FCC Commissioner Brendan Carr. A September 2, 2021, report from Hal Singer and Ted Tatos suggested that a way to tax the edge providers is to have them pay the contribution tax on their advertising revenues.

Proposals to expand funding sources for the USF will neither fix the problems nor increase internet adoption. Spreading the cost to all consumers who use the internet would reduce adoption by increasing prices for internet access when inflation is still hurting everyday Americans and forcing them to decide if they can pay for food, gas, or groceries, let alone internet access

The better solution would be for Congress to use the appropriations process to fund the USF. That would create more certainty for providers, eliminate the need for the FCC to adopt quarterly tax increases on the dwindling number of people and businesses using the basic telephone services that fund the USF, and increase transparency and accountability for how the USF is administered by the FCC and the USAC.

While the future of the USF is a stake due to the Fifth Circuit decision, if the program survives, the funding mechanism must be fixed. Giving taxpayers more control through appropriations would be a reasonable approach