ISPs Drop Case Against California's Net Neutrality Law

On May 4, broadband ISPs challenging California's net neutrality law decided against taking further legal action in ACA Connects v. Bonta. Dismissal of the case followed the Ninth Circuit's denial of the ISPs' petition for rehearing en banc. Free State Foundation scholars supported the legal position of the ISPs that the FCC's 2017 Restoring Internet Freedom Order (RIF Order) preempts California's net neutrality law. And though that case is over in the Ninth Circuit, the Second Circuit may soon reach a different conclusion about the preemptive force of the RIF Order, creating a circuit split ripe for Supreme Court review.

In ACA Connects v. Bonta, a Ninth Circuit panel held that, as a result of the FCC's decision to classify broadband Internet access service as an "information service," the agency did not decline to exercise its authority to regulate broadband; instead, the agency lacked authority to regulate broadband. In other words, Ninth Circuit determined that the Restoring Internet Freedom Order resulted in a withdrawal of FCC jurisdiction over broadband Internet access services. And the court held that because the FCC lacks jurisdiction over broadband, it can't preempt state laws. The full Ninth Circuit declined to review this decision en banc and the ISPs will not ask for Supreme Court review.

 
But the end of the ACA Connects litigation over California's net neutrality law does not definitively resolve the issue about the preemptive effect of the RIF Order. The Ninth Circuit's interpretation of the law is at odds with the June 2021 decision by the U.S. District Court in New York Telecommunications Association v. James. That case involves a legal challenge to New York's broadband price control law. The District Court in James determined that the New York law was preempted by the RIF Order. It recognized that the FCC has some, though limited, regulatory jurisdiction over information services under Title I of the Communications Act and can thus preempt state law on that ground. Free State Foundation Director of Policy Studies Seth Cooper explained and endorsed the District Court's reasoning in a June 2021 Perspectives from FSF Scholars.

The District Court's decision in James is now on appeal and the same preemption issue involving the Restoring Internet Freedom Order is pending before the Second Circuit. A prospective decision by the Second Circuit that recognizes the preemptive force of the RIF Order could create a circuit split with the Ninth Circuit.

Indeed, Free State Foundation President Randolph May believes the ISPs' termination of the ACA Connects litigation may be a strategic decision to prioritize the Second Circuit case. As quoted in the May 6 edition of Communications Daily:

ISPs might "think they have much better odds" in the 2nd Circuit case, emailed Free State Foundation President Randolph May. "The ISPs prevailed in the trial court on their claim that the New York law is preempted by the FCC's deregulatory policy established in the Restoring Internet Freedom Order," and have a good chance to win on appeal, he said. The New York law clearly involves setting rates, which "makes it an even easier preemption case for a court to understand than one" about net neutrality, said May: The possible circuit split would increase the odds of Supreme Court review. The continued litigation "highlights why it would be preferable for Congress finally to adopt a law setting forth an appropriate framework for broadband regulation," he added.

FCC Report Spotlights States' Wrongful Use of 911 Taxes

Some $285 million in 911 taxes charged to voice service consumers were improperly diverted to non-911 purposes by states in 2017. That's nearly 10% of 911 taxes. Those findings were in the FCC's 10th Annual Report on State 911 Taxes. Diversions of state 911 taxes are contrary to law and undermine the integrity of 911 tax policy. Consumers are harmed by the dishonest, extra charges, and 911 services stand to lose needed funds. 

To the FCC's credit, its report indicates states will face closer scrutiny in the future for diverting 911 taxes. Congress, the Commission, and state officials ought to consider new measures to combat states' misuse of 911 taxes and ensure compliance with the law.

The NET 911 Act of 2018 requires the FCC to annually report to Congress on state collection and distribution of 911 and enhanced 911 (E911) fees and charges. The Act was intended to "ensure efficiency, transparency, and accountability" when it comes to 911 taxes. It requires that the Commission's reports include findings on amounts of 911-related revenues spent by states for purposes other than 911-related services. To prepare its reports, the Commission sends the governors of each state questionnaires regarding 911 tax collections for each calendar year. The 10th Report observed: "All jurisdictions provided written responses to the questionnaire, but not all jurisdictions responded to every question and some jurisdictions provided incomplete responses to questions." 

In all, states collected over $2.9 billion in 911 taxes in 2017. Key findings on diversions of state 911 tax revenues are contained in the 10th Report's paragraph 27:

Based on the data we have received, we find that six states and the U.S. Virgin Islands diverted or transferred fees in calendar year 2017… Montana self-identified in its responses to the questionnaire that it used collected funds, at least in part, for non-911 related purposes. Five states [New Jersey, New York, Nevada, Rhode Island, West Virginia] and the U.S. Virgin Islands did not self-identify as diverting funds, but the Bureau has determined based on review of the information provided that these jurisdictions in fact diverted funds for non-911 related purposes within the meaning of the NET 911 Act. The jurisdictions… diverted an aggregate amount of $284,968,912.66, or 9.70% of all 911/E911 funds reported to have been collected by all responding states and jurisdictions in 2017. 

The report identified the amount of 911 taxes improperly diverted to non-911 purposes by each state. The three most notorious states were New York (over $170.8 million), New Jersey (nearly $94.2 million), and Rhode Island (almost  $11.4 million). A statement by Commissioner Michael O'Rielly rightly called out those three "repeat offenders." Moreover, the Commission's finding of nearly $285 million in diverted 911 taxes in 2017 was more than double its 2016 finding of $129 million in diverted tax dollars. 

Diversion of state 911 taxes poses a serious rule of law problem. As the 10th Report points out: "Section 6(f)(1) of the NET 911 Act requires that obligation or expenditure of 911/E911 fees or surcharges be 'in support of 9-1-1 and enhanced 9-1-1 services, or enhancements of such services.'" It goes without saying that when states impose taxes on consumers – on their citizens – for specified purposes, they should spend collected revenues only on those specified purposes. Indeed, voice service providers alleged to have improperly collected taxes from their subscribers have faced multi-state class-action lawsuits. Penalties for violating state consumer protection acts can include treble damage awards plus steep attorney fee awards. We should be no less tolerant of state governments improperly collecting taxes. States' diversions of 911 tax revenues may undermine public confidence in the integrity of 911 taxation, and in the integrity of tax laws generally. 

Additionally, unaccountable 911 taxation wrongfully hits consumers of voice services. According to the 10th Report, the average 911 fees in 2017 totaled $1.04 per line per month for wireline, $0.97 per line per month for wireless, and $0.99 per line per month for VoIP. Also: "the average prepaid wireless percentage of retail transaction 911 fee [was] 2.12%." As indicated above, 911 tax charges totaled over $2.9 billion in 2017. Voice consumers – including wireless consumers – are already subject to high taxes and fee charges by multiple governments. Such taxes include: state and local sales taxes, federal USF surcharges, state USF surcharges, industry-specific state taxes, and state 911 taxes. Indeed, a Tax Foundation estimate pegged total wireless consumer taxes at $16.1 billion for 2018, amounting to 19.1% of consumers' wireless bills. That estimate likely lowballs the amount of 911 taxes that consumers were actually charged in 2018. 

When it comes to affordability of voice and broadband services, wireless taxes hit lower-income consumers who are wireless-only especially hard. So it's especially important to curb excessive and improperly charged taxes on wireless services. FSF President Randolph May previously urged the FCC to act to prevent state 911 taxes from being assessed against low-income subscribers to no-charge Lifeline wireless service:

Putting aside the legal question, … it seems to me a matter of common sense – or sound policy, if you prefer – that the FCC should not allow states to impose taxes or fees on no-charge Lifeline service that the FCC has sanctioned by rule for the purpose of promoting access to communications services for those who otherwise cannot afford service.

In the past, a few states wrongly have either imposed 911 (and other) taxes on Lifeline services or considered doing so.

Similarly, it is sound policy for Congress, the FCC, and state officialsto ensure that 911 taxes are properly assessed and distributed. Otherwise, wireless consumers will be wrongly financially burdened and discouraged from accessing wireless communications services. And 911 services will be deprived of funds.   

The 10th Report indicated the Commission will more closely scrutinize future state responses to questionnaires on 911 taxes. Going forward, the Commission will presume revenues are being diverted to non-911 purposes unless states make more complete responses. The Commission also should follow through on report warnings that states diverting 911 tax revenues may be ineligible for upcoming matching federal grants awards from funds raised through spectrum auctions. Congress, the FCC, and state officials should consider further ways to spotlight 911 tax diversions and incentivize compliance with the Act. Certainly, governors and state legislators should direct relevant state and local government officials to provide complete and accurate answers to FCC questionnaires on 911 taxation.

If states are going to charge consumers a dollar per line each month for 911, then every tax dollar collected should go to 911-related services. It's unlawful and unfair to consumers if 911 taxes are diverted to anything else. And 911 services stand to suffer.

Additionally, low income recipients should not be assessed 911 taxes on Lifeline service. That's counterproductive and inconsistent with Lifeline's purpose. 

Restoring Internet Freedom Order Bolsters VoIP Freedom

In a blog post from October 2017, I wrote about "The Case for Keeping VoIP Free from Legacy Regulation." The blog discussed Charter Advanced Services (MN) v. Lange, a case with important implications as to whether VoIP services will remain largely free from state legacy regulation. The U.S. District Court decision under review rightly concluded that the VoIP offering at issue "engages in net protocol conversion, and that this feature renders it an 'information service' under applicable legal and administrative precedent." 

On January 10, counsel for Charter Communications filed a letter with U.S. Court of Appeals for the Eighth Circuit, outlining ways in which the Restoring Internet Freedom Order supports the conclusion that Charter's Spectrum Voice VoIP service is, in fact, a Title I information service. Among other things, the letter points out that the Restoring Internet Freedom Order:

• [E]mphasizes the "narrow scope" of the [telecommunications management] exception [to Title I] and reiterates that features "designed to be useful to end-users rather than providers" do not fall within it.

• Reiterates that information services can "include[] a transmission component," and that this "does not render broadband Internet access services telecommunications services; if it did, the entire category of information services would be narrowed drastically."


• Applies the FCC's standards for assessing when information and telecommunications components are functionally integrated and what the provider "offers"… [and] …finds that "relevant classification precedent focuses on the nature of the service offering the provider makes, rather than being limited to the functions within that offering that particular subscribers do, in fact, use."

• Expressly preempts the states from public utility regulation of broadband Internet services, reiterating to the "longstanding federal policy of nonregulation for information services" and emphasizing "Congress's approval" of that "preemptive federal
 policy." 


Certainly, broadband Internet access services offer much more transforming, processing, and other functional capabilities to end user subscribers than VoIP services. Yet, the highlighted analytical aspects of the Restoring Internet Freedom Order surely strengthen the conclusion that Charter's Spectrum Voice services are information services under Title I. In sum, the Restoring Internet Freedom Order bolsters VoIP freedom from state legacy regulation. 

Message to States: Don't Let High Pole Attachment Rates Become Barriers to Broadband

State and local governments have important policy roles to play in spurring deployment of next-generation broadband to their communities. One important thing that states can do to incentivize broadband growth is prevent unnecessary barriers to investment by keeping pole attachment rates low. For example, as explained below, a bill now pending in the North Carolina legislature dealing with what may seem like the arcane subject of "pole attachment rates," in fact, could adversely impact broadband deployment to the detriment of the states' citizens.

High costs charged to providers for leasing access to utility poles deter broadband deployments and inevitably drive up consumer prices. Local governments or utilities should be able to recover costs of maintaining utility poles. But the rates charged for pole attachments should be as low as reasonably possible. Keying pole attachment rates to the FCC's rate formula offers a sensible way for states to keep rates low while ensuring cost recovery for utility pole owners.

Congress and the FCC have recognized that local monopoly in ownership or control of poles puts utilities in a position to extract monopoly rents through unreasonably high rates. Indeed, the FCC's National Broadband Plan (2010) found that the cost of deploying a broadband network depends significantly on the costs that service providers incur to access poles and other infrastructure.

Section 224 of the federal Communications Act authorizes the FCC to "regulate the rates, terms, and conditions of pole attachments to provide that such rates, terms, and conditions are just and reasonable, and . . . adopt procedures necessary and appropriate to hear and resolve complaints concerning such rates, terms, and conditions." However, states retain broad discretion over pole attachment rates in many instances. Under Section 224's "reverse presumption" provision, states which certify that they regulate pole attachment rates are not preempted by the FCC. Further, Section 224 doesn't apply to utility poles owned by certain entities, like municipalities or cooperatives.

So how can states ensure that pole attachment rates are reasonable, and thereby avoid high rates that deter broadband growth? Setting rate standards can be a complex matter. Fortunately, even where states assume responsibility for setting pole attachment rates, states can consult the FCC's formula as a reliable guide for keeping rates low and reasonable. 

The FCC's formula for determining pole attachment rates for cable operators balances the need to keep rates low with the need to ensure that utility pole owners recover their costs. In 1987, the U.S. Supreme Court affirmed the FCC's formula for setting rates that are just, reasonable, and fully compensatory. For that matter, in 2011 the FCC revised its attachment rate standards for telecommunications providers to generally align with rates for cable providers. Of course, traditional "cable" and "telecommunications" providers now provide broadband Internet services through their upgraded networks. So pole attachment rates have a significant impact on the cost of delivering broadband.

That the FCC's Section 224 pole attachment formula is recognized for setting generally low rates makes a recent proposal to change one state's law troublesome. Now pending in the North Carolina House of Representatives is Senate Bill 88, a bill that was passed by its state's Senate. One of NC Senate Bill 88's so-called "technical changes" would eliminate a provision in North Carolina law requiring that pole attachment rate-setting include consideration of the FCC's Section 224 pole attachment formula. Existing North Carolina law does not mandate the federal formula as such. But it wisely requires the FCC's Section 224 formula to be considered in determining reasonable rates. By proposing to remove that provision from state law, the obvious inference is that NC Senate Bill 88 is intended to produce higher pole attachment rates.

State legislators unused to dealing with a subject like pole attachment rates can be forgiven for not realizing that such a "technical change" could negatively impact broadband deployment and network upgrades for their communities. NC Senate Bill 88 deserves another hard look by state legislators with the impact on broadband deployment in mind.  

Why make broadband networks more costly to deploy and upgrade? Why adversely impact citizen consumers with potentially higher prices by raising infrastructure costs? And why not at least consider an FCC-approved and Supreme Court-affirmed formula in trying to carry out a complex process? Adoption of low pole attachment rates – or at least serious attention paid to Section 224's lower rate standard – best promotes continued expansion of broadband. Accelerating broadband is in the best economic and social interests of every state and local community. This is certainly the case in rural areas where broadband penetration and capabilities stand the most in need of improvement.

States should use the FCC's Section 224 pole attachment formula as a valuable reference point for setting pole attachment rates. By doing so, states can minimize cost barriers to broadband expansion and avoid adverse consequences for their citizens' ability to pay for broadband. 

Commissioner's Staffer Makes Persuasive Case Against Muni Broadband Preemption

Matthew Berry’s August 20 remarks to the National Conference of State Legislators hit all the high points about the problems posed by the FCC attempting to preempt state restrictions on muni broadband networks.

Berry serves as Chief of Staff to FCC Commissioner Ajit Pai. In his remarks, Berry succinctly explained to the state legislators gathered at NCSL’s 2014 Legislative Summit why FCC lacks the power under Section 706 of the Communications Act to preempt state laws restricting or banning their local governments from going into the broadband Internet business. 

Stated Berry:

[T]he text of Section 706 doesn’t even mention preemption, let alone preemption of state laws that regulate municipalities. Instead, Section 706 embraces other means, like “price cap regulation” and “regulatory forbearance,” to accomplish its goals. And when it comes to the objectives set forth in Section 706(b)—removing barriers to infrastructure investment and promoting competition in the telecommunications market—the Tenth Circuit recently concluded that the provision gave the FCC authority to provide universal service support for broadband networks. In sum, Section 706 does not condone preemption of state laws either explicitly or implicitly, and so it hardly offers up the clear statement one would expect if Congress intended the FCC to “interpos[e] federal authority between a State and its municipal subdivisions.”

Berry also touched on the structural federalism principles that stand behind this legal conclusion about the limits of federal preemption of states’ control over their local governments:

Sovereignty does not rest with American cities, towns, or counties. Rather, the Supreme Court has stated that local subdivisions merely “are created as convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them in their absolute discretion.” In short, under our constitutional framework, states are free to grant or take away powers from municipalities as they see fit. So the basic concept is this: City governments are appendages of state government, but state governments most definitely are not appendages of the national government.

As Berry observes, NCSL has gone on record opposing preemption by the FCC. NCLS even stated it will pursue legal action against the FCC should it pursue preemption of state restrictions on muni broadband networks. Likewise, the American Legislative Exchange Council (ALEC), has voiced strong opposition to FCC preemption on policy, statutory, and constitutional grounds.

Free State Foundation scholars have been on top of this issue since Chairman Wheeler first announced his intention to preempt states that restrict muni broadband networks. I first set out the principal legal and constitutional defects in the Chairman’s proposal in my Perspectives from FSF Scholars Essay, “FCC Preemption of State Bans on Municipal Broadband Networks is Most Likely Unlawful.” More recently, FSF President Randolph May has written in The Hill why “The FCC Shouldn’t Go Down the Primrose (Preemption) Path.” Expect further analysis from FSF Scholars on Chairman Wheeler’s problematic preemption plans in the time ahead.

Worthy Bill in Congress Would Prevent Double Taxation of Digital Goods

Legislation in Congress would create a common sense framework for state taxation of interstate sales of digital goods and services. It would thereby stave off taxation of the same transactions for digital goods and services by multiple states. Importantly, the bill would not impose any new taxes or mandate tax or no-tax decisions by individual states. For the sake of consumers and the future of the digital economy, let's hope this bill gains traction in Congress.

S. 1364 – the "Digital Goods and Services Tax Fairness Act" – would set sourcing rules for determining when states have jurisdiction to tax retailers or taxpaying consumers. Again, this would prohibit multiple states from imposing taxes on the same transaction.

The bill would also require states that decide to tax such transactions to clearly make that determination through legislation. Taxation of digital goods through state tax department interpretations would be impermissible.

Finally, S. 1364 would ban discriminatory state taxes on the sale or use of digital goods or services. That is, it would prohibit the sale or use of digital goods or services from being specially taxed or taxed at a rate higher than similar goods or services that are not provided electronically.

In my Perspectives from FSF Scholars essay, "Digital Downloads Should Be Protected From Discriminatory and Duplicate Taxes," I explained the merits of this type of legislation in a bit more detail. Similar legislation was introduced in the last Congress. It is encouraging that members of Congress are again taking up this matter.

Supreme Court Lets Technology-Neutral Speech Decision Stand

On June 18, the U.S. Supreme Court denied review in the case of Nelson v. Time Warner Cable. This leaves standing an important decision by the U.S. Court of Appeals for the 5th Circuit, Time Warner Cable v. Hudson (2012). 

Earlier this year, the 5th Circuit struck down provisions in Texas's statewide video franchising law that subjected certain cable providers to extra regulatory burdens from which new entrant competitors remained free. Significantly, Hudson's reasoning rested on First Amendment grounds.

In my February FSF Perspectives paper, "The First Amendment for the Digital Age: A Case for Treating Modern Technologies Equally," I discuss aspects of Hudson and its implications for the future of First Amendment jurisprudence:

[T]he Fifth Circuit took seriously the idea that free speech protections belong to cable video service providers, just like other speakers. Even more significantly, it made clear that the First Amendment prohibits government regulations that selectively impose burdens on certain competing video service providers, but not others. In fact, the Fifth Circuit's decision appears to be part of a growing trend in which federal courts are no longer willing to approve departures from equal application of free speech protections, regardless of the underlying technology at issue. Time Warner Cable v. Hudson also offers a window into the future of free speech jurisprudence for modern technologies – or at least it should. In particular, the case hopefully will be a precedent that will inform a reinvigorated and principled First Amendment jurisprudence for the digital age – a jurisprudence that treats with equal respect the speech rights of all speakers using all technologies.

Perhaps the Supreme Court's imminent decision in Fox v. FCC II – also discussed in a blog post at the beginning of the Court's term – will offer further developments of First Amendment doctrine regarding speech rights relying on different media technologies.

Overburdening Wireless With by Overlapping Taxes

A study released in January by scholars at the Mercatus Center focuses on the high levels of taxation that wireless services and wireless consumers are faced with today. We've blogged about this unfortunate situation in prior posts.

In their study, "Wireless Taxes and Fees: A Tragedy of the Anticommons," Matthew Mitchell and Thomas Stratmann point out that combined federal, state and local taxes on wireless are about twice as high as the average retail sales tax. As the title suggests, the authors persuasively contend that wireless tax policy suffers from a "tragedy of the anticommons." That is, too many governments have the ability to tax wireless services, creating high levels of taxation for services for which consumers show a high degree of price sensitivity. In the authors' words:

When numerous interests are allowed to tax a single base, each does so without regard to the effect of its tax on the others. The problem can lead to over-taxation of the resource and to underutilization of the good or service being taxed. The problem is exacerbated when numerous levels of government have access to the same tax base.

The study offers another reminder about the need for tax reforms at the federal and state levels. For instance, FCC reforms of USF contributions are necessary to reduce the surcharge (that is effectively a tax) imposed on wireless consumers' monthly bills. Meanwhile, states need to better coordinate and streamline the multiple taxes assessed by tax jurisdictions within their borders and to bring overall tax rates on wireless services into line with general sales tax rates. States also need to ensure that so-called fees imposed on wireless services are not imposed for extraneous governmental purposes.