The FCC’s New Internet Taxes, Revisited

Expanding the federal universal service fund (“USF”) rate base to include broadband service does not depend on reclassification. So why is the Federal-State Joint Board on Universal Service (the “Joint Board”) delaying its vote on USF contribution reform?

While the Joint Board dilly-dallies, the contribution factor on voice services—a shrinking pot of money—just rose to nearly 17 percent and will soon exceed 18 percent for the first time. Whatever the reason for the delay, the Joint Board is willing to stick voice customers with a massive rate hike to forestall Internet taxes.

In December 2014, there was a small tremor in the telecosm when I predicted that reclassification of Internet services as “telecom services” would activate telecom-based fees at the state and local level. Michelle Ye Hee Lee of the Washington Post “fact checked” politicians who quoted a then-outdated estimate of the potential tax liability, and later chastised the Chairman of the FCC for having “misused the fact check” during a House Appropriations Committee budget hearing in March.

Well, the FCC reclassified broadband providers as common carriers providing a telecom service in February 2015, and to date there are no state fees showing up on our Internet bills.

Prediction proved wrong? Hardly.

Right before the FCC’s vote, certain states like Vermont were champing at the bit to impose telecom-based fees on broadband providers, who would in turn pass along those fees to broadband customers. To prevent this train wreck, in the agency’s February Open Internet Order, the FCC preempted states from moving forward with their own telecom-based fees for universal service (“USF contributions”) unless and until the FCC imposed such fees at the federal level.

The preemption language (paragraph 432) reads as follows:

With respect to universal service, we conclude that the imposition of state-level contributions on broadband providers that do not presently contribute would be inconsistent with our decision at the present time to forbear from mandatory federal USF contributions, and therefore we preempt any state from imposing any new state USF contributions on broadband—at least until the Commission rules on whether to provide for such contributions. We recognize that section 254 expressly contemplates that states will take action to preserve and advance universal service, but as discussed below, our actions in this regard will benefit from further deliberation. (citations omitted)

That the FCC felt compelled to preempt states from moving forward with state-based fees is strong evidence that the agency itself recognized this downside risk associated with reclassification. Why else preempt the states?

In a footnote (1471), the Order states that “the Commission has referred the question of how the Commission should modify the universal service contribution methodology to the Federal-State Joint Board on Universal Service (Joint Board) and requested a recommended decision by April 7, 2015.” (emphasis added).

It’s now seven months past its due date, and the Joint Board still has not offered a recommendation. What gives?

Last week, FCC Commissioner Jessica Rosenworcel was asked by Senator John Thune during her re-confirmation hearing why the Joint Board had not voted on this pressing issue. According to The Hill, Rosenworcel responded that the Joint Board, on which she sits, will not vote until there is more “legal certainty” about the classification of broadband service, particularly given that resources were “constrained” at the Commission.

Someone not following the debate closely could think that if the D.C. Circuit vacates the Open Internet Order—oral arguments are set for early December 2015—then the entire effort to impose USF fees on broadband providers becomes a moot point. Put differently, any efforts the government had made at that point to roll out broadband fees at the federal level would then have to be rolled back.

But this logic presumes incorrectly some nexus between reclassification and subjecting broadband providers to USF fees. In fact, the FCC does not need to reclassify Internet service to expand the revenue base for USF.

The FCC has authority under section 254(d) the Communications Act to require contributions from information service providers: “Any other provider of interstate telecommunications may be required to contribute to the preservation and advancement of universal service if the public interest so requires.” Because information services are defined as being provided via telecommunications, this section allows the FCC to require contributions from information service providers.

So if expanding the federal USF rate base to include broadband services does not depend on reclassification, why is the Joint Board stalling?

A more compelling explanation for the delay is that any assessment of fees on broadband providers at the federal level will end the preemption of state fees erected by the Open Internet Order. Imagine the political dynamics of a state like Vermont imposing state-based USF fees on broadband providers before the D.C. Circuit ruled on the FCC’s reclassification scheme! Not only would the FCC have to defend the capex meltdown that just happens to coincide with reclassification, but also the state-based tax implications. Consideration of these hidden costs could tip the cost-benefit calculus performed by the court.

By delaying the vote that would end the preemption, the Joint Board spared the FCC of this potential embarrassment during oral arguments. And the agency’s willingness to punt on any reform consideration while the contribution factor on voice services continues to rise is an abdication of its statutory responsibilities to ensure the stability of universal service.

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  1. #1 by Brent Skorup on November 4, 2015 - 9:59 pm

    Nice piece. You might also point out the legal gymnastics the FCC is capable of re: USF contributions. In 2006 it refused to classify interconnected VoIP as a telecommunications service (or information service) but still required USF contributions. I think their argument is that interconnected VoIP companies “provide telecommunications service” but don’t “offer telecommunications” (which would make them a Title II telecommunications service).

    See paras 38-49. http://www.steptoe.com/assets/attachments/1282.pdf

  2. #2 by Brett Glass on November 5, 2015 - 5:32 am

    Commissioner Ajit Pai, in his remarks and dissent, stated that Title II reclassification — which classifies broadband as a “telecommunications” service — was necessary for the Commission to levy USF taxes on broadband customers, and was likely one of its motives for reclassification. I agree. In Brand X, SCOTUS ruled that broadband had an inseparable telecommunications component but was not itself telecommunications.

    • #3 by Hal Singer on November 5, 2015 - 12:07 pm

      Telecommunications services must contribute. Brand X affirmed the FCC’s finding that broadband Internet access is not a telecom service. Whether it was telecommunications was not at issue.

    • #4 by Hal Singer on November 5, 2015 - 3:02 pm

      Also, the Commission has authority under Title I to impose USF charges on information service providers. That’s how the Commission assesses the charge on interconnected VOIP.

  3. #5 by Brett Glass on November 5, 2015 - 6:21 pm

    Actually, Brand X affirmed that Internet service was not telecommunications. Read the opinion (and the dissents).

  4. #6 by Matt Quattrochi on November 7, 2015 - 9:08 pm

    I appreciate your post, I consider myself as having a hybrid position on the subject of reclassification. Some may call me naive, I think we could properly argue just how naive I am.

    I support the position that reclassification is necessary because of the actual examples of gatekeeping and other forms of nefarious internet activity which have shown up in the past decade. At the same time I don’t support additional fees and costs which tend to follow common carriage. I truely believe that title II is necessary because Titlte I and $706 are not enough.

    Although majority of the millions of commenters from the 14-15′ NPRM misunderstand the implications of reclassification, I do believe they have actual reason to feel uneasy about ISPs and actual reason to feel mislead by the service they contracted for with their ISP. Isn’t it possible to support the regulatory aspects of Title II but also be against the prospect of regulatory fees. Even without understanding the complicated ruse known as forbearance. Whether you believe the NPRM commenters had a say in reclassification, I believe they would also have a say in opposing unnecessary fees.

    Correct me if I am wrong, but I read your article to clarify that the FCC does not need to reclassify broadband in order to demand USF contributions. If so, I learned something today! I stand on your side when you say that the FCCs decision to preempt state taxes is shady because as soon as the FCC demands broadband contributions to the USF on the federal level, $254 opens the door to state taxes. Hence there attempt to avoid the discussion all together on a legal level. The FCC portrays this theme that reclassification is really just their idea of ISPs giving up and inch, but I am extremely worried about whether the FCC plans to take a mile on the back end.

    The real issue in my mind is how to adequately protect consumer from iniquitous actions by ISPs without opening the door to unnecessary regulatory fees. Past DC court decision tell me that Title I is not enough, but there is no middle ground between title I and title II… Forbearance is meant to create a middle ground, but can we trust those expected to forbear.

    I think the December oral args are going to be a lot of fun. I am not sure whether to expect 11 billion or 15 billions in fees, and further I don’t totally buy the Capex argument. I appreciate your article for providing light where there is way to much shade.

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