USF Tax Rises to Record High 36.6%

On March 13, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the second quarter of 2025 will be 36.6%. Absent intervention by the FCC's Commissioners, the proposed rate will soon go into effect. 

The expected rate hike to 36.6% appears to result in another new all-time high for the "USF Tax." It is far higher than the rate from a few years ago. 

 

The U.S. Court of Appeals for the Fifth Circuit rightly called USF surcharges an unconstitutional "USF Tax." They are imposed on voice consumers based on a percentage of the long-distance part of their monthly bills. The money paid by consumers is collected by the voice carriers and passed on to the Universal Service Administrative Company (USAC), the private corporation established by the FCC to administer the USF program and dole out subsidies to program recipients. 

 

The Supreme Court granted a writ of certiorari in FCC v. Consumers' Research, a case involving the issue of whether the USF contribution mechanism is constitutional under the Article I, Section 1 Legislative Vesting Clause. The Court will hold oral arguments in the case on March 26. 

 

USF reform is one of the topics that is sure to be part of the discussion at the Free State Foundation's upcoming Seventeenth Annual Policy Conference – #FSFConf17. The conference will be held in Washington, D.C. on March 25. Conference registration and the conference agenda are available online. 

USF Tax Hike – Now Up to 36.3%

On December 12, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the first quarter of 2025 will be 36.3%. Early Happy New Year to American consumers! The rate hike to 36.3% appears to be yet another all-time high for USF surcharges – something the U.S. Court of Appeals for the 5th Circuit rightly called an unconstitutional "USF Tax." Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will go into effect. 

USF surcharges are functionally taxes paid by voice consumers on the long-distance part of their monthly bills. The money consumers pay is collected by the voice carriers and passed on to the Universal Service Administrative Company (USAC), the corporation established by the FCC to administer the USF program and dole out subsidies to program recipients. 

The upcoming 36.3% USF surcharge rate is significantly higher than just a few years ago. Free State Foundation President Randolph May wrote about the recent history of spiking USF surcharge rates and concerns about the viability of the USF contribution system in his blog post from June 14 of this year, "The Telephone Tax Rises Again – Now 34%." 

 

As observed in my November 26 blog post, the Supreme Court has granted a writ of certiorari in Consumers' Research v. FCC. The case, which will review an en banc decision by the 5th Circuit this summer, will be closely watched by many, including taxpayer advocates and opponents of the overreaching administrative state. In Consumers' Research v. FCC, the Court will decide the constitutionality of the USF contribution mechanism and the USF Tax.

Supreme Court Agrees to Hear Challenge to USF's Unconstitutionality

On November 22, the Supreme Court granted a writ of certiorari in Consumers' Research v. FCC. The case involves a constitutional challenge to the Universal Service Fund's (USF) contribution mechanism – or "USF Tax." The grant of certiorari is welcome news because it means that the court will resolve a circuit split between the Fifth Circuit. It also provides occasions for the court to clarify the doctrinal status and contours of the non-delegation doctrine. 

The roughly $8 billion annual USF subsidy program is funded by USF surcharges included as line items on the long-distance portion of voice consumers' monthly bills. Due to the increasing size of subsidy distributions and the shrinking size of the contributor base, the quarterly-adjusted surcharge rate has risen to 35.8% -- a much, much higher rate than just a few years ago. 

 

The Supreme Court will be reviewing the July 24 en banc decision by the U.S. Court of Appeals for the Fifth Circuit that determined the universal service contribution mechanism violates the Legislative Vesting Clause of Article I of the U.S. Constitution. The Fifth Circuit held that Congress's broad delegation of tax authority to the FCC under Section 254 of the Communications Act, combined with the agency's delegation of tax authority to a private entity to collect surcharges from voice carriers and administer the USF, constituted a constitutional violation. Fifth Circuit's en banc decision in Consumers' Research v. FCC, as well as the concurring and dissenting opinions, are summarized in my August 5, 2024 Perspectives from FSF Scholars, "Fifth Circuit Rules USF Contribution Scheme Violates Legislative Vesting Clause." 

 

The Sixth and Eleventh Circuits previously upheld the USF's contribution mechanism from identical challenges. The Supreme Court will resolve the split between the lower courts. And the court will have occasion to revisit the non-delegation doctrine, which is implicated by the case.  

 

In 2025, expect Free State Foundations scholars to have more to say about a future Supreme Court decision in Consumers' Research v. FCC and the need for Congress to modernize the USF for the broadband era. 

Governor Moore Fails to Improve Maryland’s Tax Competitiveness

On October 31st, the Tax Foundation released the 2025 State Tax Competitiveness Index, which ranked states’ overall tax systems and certain individual taxation categories. The index considered several criteria for ranking states, including tax system complexity, aggressiveness, and structure. Additionally, the index considers corporate income, individual income, sales, property, and unemployment insurance taxes in the overall rankings.

In August 2023, Governor Wes Moore said, “Maryland has some of the best talent and assets in the world. But our economy is not reaching its full potential [...] The time for discipline is now.” Throughout his tenure as governor, Moore has continued claiming the state needs to make “difficult fiscal decisions.” Still, while he has continued to tout the need for budgetary discipline, Maryland’s government continues to fail to have enough discipline to create a competitive tax environment. This is why it is the fifth worst state in the nation in terms of “tax competitiveness.”

Maryland’s poor ranking is not entirely new, as it has been considered one of the ten least competitive state tax environments since 2020. However, according to the Tax Foundation's new analysis, Maryland’s score has worsened since then, so that it is now ranked 46th in the nation. For some states, being uncompetitive on taxation may be acceptable. For example, Hawaii is also poorly ranked, but few states compete for people and businesses with Hawaii. Maryland, however, has four states bordering it, as well as the capital. Except for DC, every state bordering Maryland is ranked at least 12 spots higher for tax competitiveness.

Virginia, in particular, is a competitor for businesses and people looking to live in the extended DC area. Its overall state taxation competitiveness ranking is 28th, 18 places better than Maryland's. Unlike some states with few or no bordering states to compete with, Maryland’s competitiveness with other states will heavily impact how many people and businesses vote with their feet.

Examining the index, it is clear that Governor Moore must do more than he has thus far if he wants to improve Maryland’s very poor tax competitiveness ranking.

Because the index considers so many taxes, Maryland’s overall scoring is poor for a multitude of reasons. Firstly, Maryland’s income tax is very progressive, with a high maximum tax rate of 5.75%, meaning higher income earners will want to live elsewhere. Additionally, standard deductions and personal exemptions are relatively small in Maryland, and there are no tax adjustments for inflation. Thus, as the U.S. dollar’s value declines due to inflation and wages are adjusted to match that, even working-class Marylanders will slowly move into higher tax brackets.

Maryland’s corporate tax rate is 8.25 percent, significantly higher than Virginia, West Virginia, or North Carolina’s. Maryland’s inclusion of a global intangible low-taxed income in its corporate tax base makes it rare among the states. This means that even profits from non-U.S. companies owned by Marylanders are taxed at the state corporate tax rate, which many other states do not require, including Virginia and Pennsylvania.

Lastly, Maryland’s tax complexity is much higher than other states. It is the only state in the country to impose digital advertising taxes, which are difficult to navigate and comply with. Although this tax only went into effect in 2022, multiple lawsuits have already been filed contesting the law behind it. Maryland is also the only state in the country with both estate and inheritance taxes, with high maximums, further incentivizing wealthy taxpayers to leave the state.

While many of these tax policies existed before Gov. Moore entered office, a governor showing proper fiscal “discipline” should fight to reduce these taxes. Moore should pursue the fiscal discipline he advocated for at the start of his administration and increase Maryland’s tax competitiveness. Otherwise, the state will continue to lag behind its neighbors economically.

USF Surcharge Rate Hike – Now Up to 35.8%

On September 11, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the fourth quarter of 2024 will be 35.8% This appears to be an all-time high and serious concern for voice consumers who bear the burden of paying for USF surcharges. Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will soon go into effect.

Functionally, USF surcharges are taxes paid by voice consumers on the long-distance portion of their monthly voice service bills. The USF tax money collected by the voice carriers goes to the Universal Service Administrative Company (USAC), a corporation established by the FCC, which is the administrator of the USF program and distributes the money to program recipients. For additional background on the recent history of persistent and worrisome increases in the USF surcharge rate, see Free State Foundation President Randolph May's June 14, 2024 blog post, "The Telephone Tax Rises Again – Now 34%." 

 

My August 9 Perspectives from FSF Scholars, "Court Ruling on USF's Unconstitutionality Should Spur Reform in Congress" explained that the Fifth Circuit’s decision holding the USF contribution scheme unconstitutional in Consumers' Research v. FCC should serve as a catalyst for Congress to promptly undertake fiscal reforms of the USF program and put it on stronger constitutional footing.  

American Copyright Owners Deserve Royalties When Radio Stations Use Their Property

 On June 26, the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet held a Hearing titled "Radio, Music, and Copyrights: 100 Years of Inequity for Recording Artists." The hearing featured testimony from witnesses on two competing legislative measures introduced in the 118th Congress: the American Music Fairness Act of 2023 and the Supporting the Local Radio Freedom Act.

The American Music Fairness Act – H.R. 791 and S.253 – would finally recognize a public performance right in terrestrial AM/FM radio broadcasts of copyrighted music recordings. If passed into law, the Act would require for-profit AM/FM stations to pay royalties to owners of sound recordings for the use of their intellectual property just like online streaming services do. Smaller commercial AM/FM stations as well as non-profit stations that have less financial resources would qualify for a significantly reduced annual royalty payment of $500, $100, or $10. 

Testimony by country music star Randy Travis and his wife Mary Travis challenge the position of many radio stations that American recording artists don't deserve a public performance right for their sound recordings for radio airplay because radio broadcasts of their music promote sales of physical CDs, merchandise, and tickets. Indeed, in the age of digital streaming services, revenues from CD sales are only a fraction of what they were many years ago, and many recording artists struggle to make a living and pay their crew and other co-workers. Commercial terrestrial AM/FM radio stations profit from playing copyrighted sound recordings. Internet streaming and satellite radio services pay public performance royalties for broadcasting copyrighted sound recordings, and it makes no sense to continue giving terrestrial AM/FM radio services. 

 

At the hearing, SoundExchange CEO Michael Huppe testified to the important point about how the American Music Fairness Act would benefit American recording artists and copyright owners by unlocking significant royalties from foreign radio stations. As explained in my March 27 blog post, "Music Revenue Report Should Spur Congress to Secure Copyrights Fully":

Under existing international agreements, foreign terrestrial AM/FM radio stations do not have to pay royalties for playing copyrighted music owned by Americans so long as domestic terrestrial AM/FM radio stations in the U.S. have no obligation to pay such royalties. Passing the American Music Fairness Act would open up those foreign royalty streams to U.S. copyright owners. Importantly, the legislation is sensitive to the limited financial resources of smaller commercial and non-profit stations by treating them to a low, flat royalty rate. 

The case for the American Music Fairness Act is presented in further detail in my February 2022 Perspectives from FSF Scholars, "American Music Fairness Act Would Secure Copyrights in Sound Recordings," and in my August 2021 Perspectives from FSF Scholars, "Congress Should Secure Full Protections for Music Sound Recordings." 

 

Testimony from National Association of Broadcasters President and CEO Curtis LeGeyt endorsed the Supporting the Local Radio Freedom Act – H.ConRes.13 and Sen.Con.Res.5  – a resolution stating that Congress should not impose "any new performance fee, tax, royalty, or other charge" on a local radio station broadcasting sound recordings over the air. But Mr. LeGeyt's testimony, like the Supporting the Local Radio Freedom Act, wrongly lumps payment of royalties by a radio station for commercially exploiting someone else's copyrighted property in with fees and taxes paid to the government. NAB's position isn't new, and it doesn't overcome the just claims of the owners of copyrighted property. I addressed the critical distinction between royalties and taxes in my September 2022 blog post, "In Debate Over Radio Royalties, Congress Should Favor Property Rights."

 

The American Music Fairness Act deserves to be advanced by Congress because it is a sound policy rooted in constitutionally recognized property rights principles. The other legislative measure is not. 

State Court Rules that USAC is Tax-Immune in Lifeline Case

On March 7, the Washington State Supreme Court issued its decision in Assurance Wireless USA, LP v. State of Washington Department of Revenue (2024). At issue in the case is whether funds received by telecommunications carriers participating in the federal Lifeline program are subject to Washington's retail sales tax. In a unanimous 9-0 decision, the Washington Supreme Court concluded that because the Universal Service Administrative Company (USAC) operates as an instrumentality of the federal government, imposition of the retail sales tax violates the intergovernmental tax immunity doctrine. The effect of the court's decision is that it ensures that tax burdens are not saddled on Lifeline program providers and low-income beneficiaries.

The USAC is the FCC's appointed non-profit entity for administering the Universal Service Fund and the Lifeline program. The Washington Supreme Court determined that the USAC is the "buyer" from whom telecommunications carrier and Lifeline program participating provider Assurance Wireless should have been collecting the tax. That is to say, the court determined that the incidence of the state retail sales tax falls on the USAC.

Under the intergovernmental immunity doctrine, the federal government and instrumentalities closely connected to it are immune from all forms of taxation absent express Congressional waiver of immunity. The Washington Supreme Court determined that provisions contained in Section 254(e) and 254(f) of the Communications Act do not constitute Congressional waivers. Looking to factors identified in U.S. Supreme Court jurisprudence for determining whether an instrumentality is closely related to governmental activity and therefore tax-immune, the Washington Supreme Court wrote: 

Weighing all the factors, we conclude that USAC is an instrumentality of the federal government. It exists solely to carry out the FCC's mission of advancing universal service, which includes the Lifeline program, and USAC pursues no independent business objectives. Congress has acknowledged the FCC's reliance on USAC and approved of their relationship as the means of implementing universal service programs. Further, although USAC is nominally an independent nonprofit, the FCC's regulatory control over USAC's operations, leadership composition, and finances have produced an entity so closely related to the FCC that we conclude it operates as an instrumentality of the federal government for purposes of the intergovernmental tax immunity doctrine. 

In a November 9, 2024 FSF Blog post, "State Court Weighing USAC on Tax Immunity for Lifeline," I previewed this case. I suggested that Assurance Wireless USA had a stronger position on the tax immunity of the USAC. Former FCC Commissioners Robert McDowell and Mignon Clyburn were among those who filed amicus curiae briefs favoring tax immunity for the USAC. The effect of such immunity is that it better enables Lifeline to serve its programmatic purpose of providing telecommunications services to qualifying low-income individuals. 

 

Universal service reform and the Lifeline program were topics for discussion during the hot topics in communications law and policy panel at the Free State Foundation's 16th Annual Policy Conference held on March 12.

 

 

Video of that panel and former FCC Commissioner Mignon Clyburn in discussion with former Commissioner Mike O’Rielly and two current Commission members can be found on FSF's video web page. 

Tax Foundation Reports on Overtaxed Wireless Consumers, Including in Maryland

On November 13, the Tax Foundation released a report titled "Excise Taxes and Fees on Wireless Services Drop Slightly in 2023." It is the 14th edition of the Tax Foundation’s report on taxes, fees, and surcharges imposed by federal, state, and local governments on wireless services. According to the report, "Nationally, taxes, fees, and government surcharges make up a record-high 24.5 percent tax on taxable voice services.” Also, the report found that since 2012, the average charge from wireless providers decreased 26%, from $47.00 per line per month to $34.56 per line, yet wireless taxes, fees, and surcharges increased from 17.2% to 24.5% of the average bill.

The Tax Foundation's report helpfully describes the multiple types of taxes, fees, and surcharges that different governments impose on wireless services, and offers breakdowns and rankings for different states. Among the states, the report found that the state of Maryland had the 11th highest wireless tax rate at 15.91%. And presuming an effective federal USF tax rate of 10.83%, the result is that Maryland residents are hit with a combined federal/state/local tax rate of 26.74% on their wireless service bills. As the report observes, tax rates for wireless services in many states are significantly higher than general sales tax rates.  Maryland had the 7th highest disparity between wireless taxes and general sales tax, as Maryland's 15.91% tax rate for wireless services is much higher than the state's general sales tax rate. 

 

Rightly, the Tax Foundation's report identified serious policy problems that arise from state and local governments singling out wireless services for higher tax, fee, and surcharge burdens. The financial burdens fall the hardest on low-income consumers, many of whom live in wireless-only households for Internet access. And high taxes can harm private sector investment in wireless network infrastructure. Also, the goal of tax policy ought to be collection of revenues. To that end, tax laws should ideally be neutral toward consumer activity. It is a misuse of tax laws to target or try to change specific behaviors.

 

By shedding light on the problem of wireless over-taxation and ranking the states with the biggest wireless tax addictions, the Tax Foundation has provided an important public service. Maryland and other states should reform their tax policies and cut their taxpayers a break. 

State Court Weighing USAC on Tax Immunity for Lifeline

On October 26, the Washington Supreme Court heard oral arguments in Assurance Wireless USA v. State of Washington Department of Revenue. At issue in the case is Washington State's attempt to impose retail sales tax obligations on Assurance for providing wireless services to individual participants in the Lifeline program. The parties disagree over the Assurance's provision of wireless services to individuals is a taxable sale. The Lifeline subscribers do not pay Assurance for the service, and Assurance claims that the FCC is the buyer of Lifeline services because payment to Assurance comes from the FCC via the U.S. Treasury and that the transaction is therefore immune from state taxation. But the State argues that the Universal Service Administrative Company (USAC) is the buyer of the wireless services for Lifeline users, and thus as a private corporation – and not, it is argued, a federal instrumentality – the transactions are not immune from taxation.

Indeed, the central question to be addressed by the Washington Supreme Court in Assurance Wireless USA is whether the USAC is a federal instrumentality that is exempt from state taxation. Owing to the peculiar composition and function of the USAC in administering the Lifeline program on sub-delegated authority from the FCC, the parties' briefings offer sharply contrasting views on the matter.

According to Assurance's supplemental brief: 

Unlike a federal contractor, USAC is so interconnected with the FCC's function of universal service that the two cannot realistically be viewed as separate. USAC was created at the FCC's direction. Pet. 22. USAC has no funding apart from the USF, and the FCC approves its quarterly administrative budget. 47 C.F.R. § 54.423. The FCC prescribes each of USAC's functions and the rules under which it carries out these functions. USAC must report the amounts of money disbursed for Lifeline to the FCC on a quarterly basis. 47 C.F.R. § 54.702(h). Such reporting must comply with federal financial management statutes. 47 C.F.R. § 54.702(n). The FCC appoints and/or approves all USAC’s board members. 47 C.F.R. § 703(c)… For purposes of federal laws, courts have noted the FCC's control over USAC is so integrated that USAC should be treated as the government… If USAC does not "stand in the shoes" of the FCC when it performs mere ministerial tasks at the FCC’s behest, no private entity would ever be treated as an instrumentality. Pet. 26. No court has overruled the longstanding precedent which extends tax immunity to federal instrumentalities. See Rev. Rul. 57-128, 1957-1 C.B. 311 (listing factors that the I.R.S. uses to determine if entities are instrumentalities of states for purposes of the federal taxation).

But the Washington Department of Revenue views the USAC differently: 

[T]he U.S. Supreme Court has narrowed the concept of an "instrumentality" of the federal government. In order for the courts to confer tax immunity on a private entity, that entity must be "incorporated into the government structure." New Mexico, 455 U.S. at 737 (internal quotation marks omitted). Or, stated slightly differently, the private entity must be "'so assimilated by the Government as to become one of its constituent parts.'"… Congress has not conferred tax immunity on the USAC, and Assurance does not argue otherwise. Moreover, imposing a state retail sales tax on goods or services purchased by the USAC in no way interferes "with the functions of [the federal] government itself." New Mexico, 455 U.S. at 736… Instead, the USAC is a wholly-owned subsidiary of a trade association that has been given the responsibility to "collect, pool, and disburse the universal service support funds contributed by carriers." Incomnet, 463 F.3d at 1067. Moreover, the USAC has expressed publicly that it is not "a federal government agency or department or a government controlled corporation." CP 299. Likewise, the FCC has publicly acknowledged that the USAC "is a private corporation, not a public entity." Report on the Future of the Universal Service Fund, FCC 22-67 at *41 ¶ 117, 2022 WL 3500217 (F.C.C. 2022) (citations omitted). Because the USAC is a private corporation and not a federal entity, members of its board of directors are not required to be nominated and appointed by the President of the United States under the Appointments Clause of the federal constitution. Id.

There is no timeline on when Washington Supreme Court will make its decision. However, I favor the view that the USAC is a federal instrumentality and thus immune from taxation.

 

Free State Foundation President Randolph May and I address a broader set of structural issues regarding universal service – including programs such as Lifeline – in our April 2021 Perspectives from FSF Scholars, "Congress Should Put Universal Service on a Firmer Constitutional Foundation." And in August of this year, FSF President May and I submitted public comments with Universal Service Fund Working Group led by Senators Ben Ray Lujan and John Thune. 

USF Surcharge Rate Spikes to 34.5%

On September 13, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the fourth quarter of 2023 will be 34.5%. This appears to be a record high and a matter of concern for voice consumer welfare and for the future financial integrity of the USF. Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will soon kick in.

The 34.5% figure may not be as high as the prediction of a 36.2% rate for the quarter that was recently was made by an analyst – and discussed in Free State Foundation President Randolph May's September 6 blog post, "How Do You Spell 'Unsustainable'? U-S-F!" But 34.5% is unreasonably high and burdensome on voice consumers. The recent rate increase provides another reminder that a future financial derailment of USF remains an alarming realistic concern that Congress should address. 

 

As briefly noted in my blog post from March 15 of this year, "Consumers Still Burdened as FCC Sets USF Surcharge Rate at 29%" – the USF contribution factor is used to determine the line-item surcharge on voice consumers' monthly bills. The surcharges effectively are taxes on voice consumers to pay for USF programs. 

 

On August 25, the Free State Foundation submitted comments to the Universal Service Working Group lead by Senators Luján and Thune. In those comments, we recommended that Congress replace the current USF system with a broadband-oriented regime that is more focused on supporting low-income Americans and more politically accountable. 

Sixth Circuit Denies Nondelegation Challenges to USF Regime

On May 4, the U.S. Court of Appeals for the Sixth Circuit rejected nondelegation and private nondelegation challenges to Section 254 of the Communications Act. In Consumers' Research v. FCC, a three-judge panel for the Sixth Circuit held unanimously that the statutory framework regarding universal service that Congress provided the FCC in Section 254 "contains an intelligible principle because it offers nuanced guidance and delimited discretion to the FCC." Additionally, the court held that "[b]ecause of the [Universal Service Administrative Company's] subordination to the FCC and its assistance with fact gathering and ministerial support, there is no private non-delegation doctrine violation."

A similar legal defeat regarding nondelegation challenges to the administrative mechanism for funding universal service took place in the Fifth Circuit on March 24 of this year. Apparently, the decision in the Fifth Circuit is the subject of a pending petition for en banc review by the entire Fifth Circuit. Another case raising nondelegation challenges to Section 254 is still pending in the Eleventh Circuit. 

Consumers Still Burdened as FCC Sets USF Surcharge Rate at 29%

On March 14, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the second quarter of 2023 will be 29%. Barring any unlikely by the FCC's Commissioners, the proposed rate will soon kick in. Although that amounts to a slight decrease compared to the first quarter contribution factor of 32.6%, the figure is still unreasonably high and burdensome on voice consumers.  

The USF contribution factor is used to determine the line-item surcharge that is added to the monthly bills of voice consumers. The surcharges are functionally taxes imposed on voice consumers to pay for USF programs. As explained in my August 23, 2022 Perspectives from FSF Scholars, "Congress Should Consider Expanding Universal Service Contributions: FCC Poses a Potential Answer to USF's Financial Problems." In addition to pursuing contribution reforms, Free State Foundation President Randolph May recommended in his August 26, 2022 Perspectives from FSF Scholars,"The FCC's USF Report: Unprecedented Broadband Funding Requires Fundamental Universal Service Reforms," that Congress should re-evaluate the size of USF programs in light of the several billions that has recently been allocated to support broadband deployment and service on top of existing outlays for USF. Those additional subsidies include the $42.45 billion Broadband Equity, Access, and Deployment (BEAD) Program. And as FSF Senior Fellow Andrew Long explained in his August 30, 2022 blog post, "A True Assessment of the USF's Future Relevance Demands a Full Accounting of Broadband Subsidies."

Importantly, there also are serious questions regarding the constitutionality of how the USF quarterly contribution factor is determined. As explained in blog posts from April 2022 and October 2022, FSF President Randolph May and the Free State Foundation have joined amicus briefs in ongoing cases before federal circuit courts of appeal that raise challenges to the FCC's USF contribution regime based on the non-delegation doctrine and the major questions doctrine. 

Broadband Subsidy Tax Companion Bill Introduced in the House

On Wednesday, a version of the Broadband Grant Tax Treatment Act (BGTTA), a Senate bill that would shield federal broadband infrastructure subsidies from taxation, was introduced in the House of Representatives.

As I described in a November 17, 2022, post to the FSF Blog, Senators Mark Warner (D-VA) and Shelly Moore Capito (R-WV) authored the BGTTA in response to the 2017 Tax Cuts and Jobs Act, which directs the Internal Revenue Service to treat federal grants as taxable income beginning in 2023.

The BGTTA would exempt from taxation federal broadband funding appropriated by the American Rescue Plan Act and the Infrastructure Investment and Jobs Act, including the $42.45 billion Broadband Equity, Access, and Deployment (BEAD) Program.

The House version, which mirrors the Senate draft, is sponsored by Representatives Jimmy Panetta (D-CA) and Mike Kelly (R-PA) and cosponsored by Terri Sewell (D-AL) and Drew Ferguson (R-GA).

Responding to the news, USTelecom President Jonathan Spalter described the bill as "right on the money." And Kelly Cole, CTIA Senior Vice President, Government Affairs, stated that it "maximizes grants, which is vital in the deployment of broadband and closing the digital divide."

Draft Bill Would Treat Broadband Subsidies as Nontaxable

Yesterday Senator Angus King (I-ME) became the latest cosponsor of the Broadband Grant Tax Treatment Act (BGTTA), joining a bipartisan group that includes Tim Kaine (D-VA), Roger Wicker (R-MS), Rev. Raphael Warnock (D-GA), and Shelley Moore Capito (R-WV). Introduced by Senators Mark Warner (D-VA) and Jerry Moran (R-KS), the BGTTA would exempt certain federal broadband grants from taxation – and thereby maximize the utility of that funding.

Currently, the IRS can shield from taxation certain broadband subsidies, as it did in 2010. Beginning next year, however, the 2017 Tax Cuts and Jobs Act will require that the Internal Revenue Service (IRS) treat all federal grants as taxable income.

The BGTTA would exclude from the definition of "taxable income" broadband infrastructure funding derived from the Infrastructure Investment and Jobs Act (most notably, the $42.45 billion Broadband Equity, Access, and Deployment (BEAD) Program) and the American Rescue Plan Act (in particular, the $350 billion State and Local Fiscal Recovery Funds Program and the $10 billion Coronavirus Capital Projects Fund).

In a letter dated November 2, 2022, to leadership of the Senate Finance Committee and the House Committee on Ways and Means, a group of trade associations (the Competitive Carriers Association, CTIA – The Wireless Association, NTCA – the Rural Broadband Association, TIA – The Telecommunications Industry Association, USTelecom – The Broadband Association, and WIA – Wireless Infrastructure Association) urged passage of the BGTTA.

Specifically, they wrote that "if Congress fails to act, grant recipients will be required to return as much as 21 percent of the broadband grants to the federal government in the form of taxes" and "it is … incumbent upon Congress to act to free the ARPA and IIJA broadband grants from taxation and ensure all of the broadband grants awarded will be used to reach Americans with connectivity needs."

Also on Wednesday, Senator Warner stated at the 2022 USTelecom Broadband Investment Forum that he is "engaged [in] real-time conversations with the finance committee and others to see if we could get this included (in) the end-of-the-year package."

At that same event, his fellow sponsor of the BGTTA Senator Moran reportedly "advocated robust congressional oversight," argued that "Congress should use its power of the purse to promote executive agency accountability," and "called for close coordination between the FCC, the National Telecommunications and Information Administration, and the [Department of Agriculture's] Rural Utilities Service."

In "Absent Oversight, the Broadband Funding Faucet Likely Will Overflow," a Perspectives from FSF Scholars published last week, I warned that, without improved interagency coordination, more federal dollars than are required to connect locations as yet unserved could be disbursed.

Whether taxed or not, the need to ensure the efficient and responsible allocation of broadband subsidies remains paramount.

Constitutional Challenge to USF's System for Subsidy Fees Filed in the 11th Circuit

On October 3, a constitutional challenge to the Universal Service system of surcharge fees – which are effectively taxes on voice consumers – was filed in the U.S. Court of Appeals in the Eleventh Circuit. The plaintiffs in Consumers' Research v. FCC raise several non-delegation claims in their petition based on Article I, Section 1 of the U.S. Constitution. Additionally, the plaintiffs challenge the statutory authority of the Universal Service Administrative Authority (USAC) to administer the subsidy fee system, and they also raise an alternative claim against the USAC's authority pursuant to the Appointments Clause in Article II, Section 2 of the Constitution. Plaintiffs also challenge the USF Tax Factor for failure to comply with the Administrative Procedures Act regarding rulemakings and for failure to be published in the Federal Register.

The claims raised in the plaintiffs' petition to the Eleventh Circuit in Consumers' Research v. FCC are similar to claims raised in pending cases in the Fifth and Sixth Circuits. The Free State Foundation and FSF President Randolph May have joined amicus curiae briefs filed by the Competitive Enterprise Institute (CEI) in both the Fifth and Sixth Circuit cases. The amicus brief joined by FSF and FSF President May was the subject of a blog post from April 19 of this year. And the other amicus brief was filed in the Sixth Circuit on September 29. Many thanks go to CEI. According to court docket records, the Fifth Circuit has tentatively scheduled oral arguments for December 5, 2022.

The constitutional and statutory challenges raised by Consumers' Research and others to the Universal Service Fund's system for imposing and administering surcharge fees are principled, thoughtful, and deserving of careful consideration by the judiciary. 

 

P.S. For recent takes on the need for Congress to modernize the Universal Service system, be sure to check out FSF President Randolph May's August 2022 Perspectives from FSF Scholars, "The FCC's USF Report: Unprecedented Broadband Funding Requires Fundamental Universal Service Reforms" as well as FSF Senior Fellow Andrew Long's August 30 blog post, "A True Assessment of the USF's Future Relevance Demands a Full Accounting of Broadband Subsidies."

In Debate Over Radio Royalties, Congress Should Favor Property Rights

An article published in Law360 on August 31 covers the ongoing debate in Congress over whether AM/FM radio stations ought to pay royalties when the stations play copyrighted sound recordings over-the-air. Mixed into the debate is an attempt by some radio broadcasters to equate copyright royalties with taxes. But it's a ruse and easy to see through. Royalties are rooted in intellectual property (IP) rights, and Congress should recognize the right of sound recording owners to receive royalties when their copyrighted music is played on the radio. 

The Law360 article mentions House Concurrent Resolution 33, which opposes recognizing the exclusive right of music recording owners to receive royalties when radio stations, including for-profit stations, broadcast their intellectual property (IP). House Concurrent Resolution 33 (H.Con.Res.33) states that "Congress should not impose any new performance fee, tax, royalty, or other charge relating to the public performance of sound recordings on a local radio station for broadcasting sound recordings over-the-air, or on any business for such public performance of sound recordings."

 

It's bothersome that the House resolution lumps in public performance royalties with government fees and taxes. There are obvious, categorical differences between those things, but the resolution's language appears intended to blur the distinctions. Royalties are not taxes or government fees. Royalties come from private property rights. They are proceeds from the use of one's private property by another private party. 

 

The House resolution gets it right on taxes, but wrong on royalties. Congress should not impose new government fees or taxes on users of copyrighted sound recordings like AM/FM radio stations. But Congress also should not continue to privilege radio stations with free rider use of copyrighted sound recordings that belong to third parties. That privilege unjustly undermines the property rights of sound recording owners to receive a return when their private property is commercially exploited. 

 

For a legislative approach to this topic that better respects IP rights, see my August 2021 Perspectives from FSF Scholars, "Congress Should Secure Full Copyright Protections from Sound Recordings" and my February 2022 Perspectives, "American Music Fairness Act Would Secure Copyrights in Sound Recordings." As explained in those papers, the American Music Fairness Act (H.R. 4130) would finally recognize that sound recording owners have a public performance right to receive royalties when their copyrighted works are played over-the-air by AM/FM radio stations. The Constitution's Article I, Section 8 Copyright Clause gives Congress the responsibility to secure property rights in creative works such as sound recordings. And the American Music Fairness Act, if enacted, would achieve a pro-property rights result. The House Judiciary Committee ought to favorably report the bill and the House ought to pass it.   

Free State Foundation Files Brief Supporting Constitutional Challenges to USF Regime

On April 18, the Free State Foundation and FSF President Randolph May filed an amicus curiae brief in the Fifth Circuit Court of Appeals in a case challenging the constitutionality of the FCC's universal service regime. The amicus brief, which is led by the Competitive Enterprise Institute and includes other telecommunications and administrative law experts, argues that the imposition of the USF contribution fee by the FCC and the Universal Service Administrative Company violates the nondelegation doctrine and the major questions doctrine, both of which are central to maintaining the separation of powers required by the Constitution. The case is Consumers' Research v. FCC.  

Here are two key paragraphs from the amicus brief's introduction:

Only Congress has the power to lay and to collect taxes for the general welfare of all Americans. Regardless of the public policy that it seeks to advance, Congress cannot delegate this power to the FCC or any other executive branch agency. Yet that is exactly what Congress did when it enacted the Telecommunications Act of 1996 to create a universal service program for the Commission to raise revenue however it sees fit "for the protection of the public interest" in seeking to provide greater access to telecommunications services. 47 U.S.C. § 254(b)(7). 

 

The Constitution does not permit Congress to circumvent the legislative process by allowing an independent agency (guided by a private company owned by an industry trade group) to raise and to spend however much money it wants every quarter for "universal service" at the expense of every American who pays a monthly phone bill. Elected representatives of the people, not the Federal Communications Commission, must be responsible for making the difficult decisions to raise the revenue that funds this program. 

The amicus brief argues that the "contribution" mandated by Section 254 of the Communications Act is functionally a tax and that Congress's delegation of broad regulatory power to the Universal Service Administrative Company (USAC) – a private corporation – raises serious structural separation-of-power issues. As the brief states: 

The Company now rakes in nearly $10 billion each year in 'contributions' (ultimately borne by consumers), which it then disburses to libraries, schools, rural areas, and carriers providing services in high-cost areas... Yet Congress provided no direction as to how either the FCC or the Universal Service Administrative Company should calculate rates for service providers or how much money should be collected and distributed each year. 

As mentioned above, the amicus brief also argues that "[t]he major questions doctrine forecloses any interpretation of Section 254 that would allow the FCC to collect and to spend billions of dollars every year as it sees fit."

 

The amicus brief in Consumers' Research v. FCC is available for reading here. And thank you to the Competitive Enterprise Institute and their legal counsel. 

 

For more on the constitutional problems with the universal service regime, see FSF President Randy May's November 2021 Perspectives from FSF Scholars, "A Nondelegation Doctrine Challenge to the FCC's Universal Service Regime," as well as our April 2021 Perspectives, "Congress Should Put Universal Service on a Firmer Constitutional Foundation." Additionally, the Free State Foundation filed comments in February 2022 and reply comments in March of this year in the FCC's proceeding for its upcoming Report on the Future of the Universal Service Fund.