Fifth Circuit Finds Universal Service Contributions to Be Unconstitutional Tax

In a surprise yesterday that could shake rural telecommunications services and broadband construction, the en banc panel of the U.S. Court of Appeals for the Fifth Circuit in New Orleans found that the contributions system for the FCC’s universal service program amounts to an unconstitutional tax on the American public. However, the 9-7 ruling conflicts with decisions already handed down by two other appeals courts as well as with decades of precedent. The Supreme Court could reverse the ruling.

“The Universal Service Fund has been, and continues to be, a critical tool to narrow the digital divide and help address connectivity gaps. The court’s decision today deals a severe blow to these efforts and could put at risk the availability and affordability of essential communications services for millions of rural Americans, low-income consumers, and community anchor institutions,” said NTCA – The Rural Broadband Association, the Competitive Carriers Association, and USTelecom – The Broadband Association said in a joint statement. “We steadfastly believe that the Universal Service Fund is constitutional, and we will continue to fight for universal connectivity.”

The current universal service program, as established by the Telecommunications Act of 1996, collects “fees” from interstate and international telecommunications carriers to provide subsidies to low-population, rural areas. The universal service fee often appears as a line item on consumer bills. Universal service traditionally has supported to rural telephone companies to maintain affordable residential and business landline services. The 1996 Act expanded the service to include the Schools & Libraries, Rural Healthcare and Lifeline (low-income support) mechanisms.

The Act designated the FCC to collect the fees and the FCC designated a non-profit industry group, The Universal Service Administrative Co. (USAC) to handle the collection and distribution processes. USAC each quarter calculates the percentage of interstate and international revenues participating carriers must contribute to the program. The proposed third-quarter 2024 contribution rate announced in June is 34.4 percent. Universal service collections currently total about $9 billion annually.

The court ruled that universal service contributions, even though they are collected from carriers rather than the public, amount to a tax in violation of Article I of the Constitution. “American telecommunications consumers are subject to a multibillion-dollar tax nobody voted for,” according to the majority court opinion. “The size of that tax is de facto determined by a trade group staffed by industry insiders with no semblance of accountability to the public. And the trade group in turn relies on projections made by its private, for-profit constituent companies, all of which stand to profit from every single tax increase.”

Consumers’ Research, a nonprofit activist group, has led challenges to the program, which failed earlier in the Sixth and Eleventh Circuits. In June, the Supreme Court denied Consumers’ Research’s petition to hear those cases. Now conflict among the circuits raises the likelihood that the Supreme Court will consider the issue.

“This decision is misguided and wrong. It upends decades of bipartisan support for FCC programs that help communications reach the most rural and least-connected households in our country,” said FCC Chairwoman Jessica Rosenworcel in a statement. “The opinion reflects a lack of understanding of the statutory scheme that helped create the world’s best and most far-reaching communications network.”

Updated, Aug. 6: Consumers’ Research, the nonprofit group that challenged the FCC’s universal service contributions system in the Fifth, Sixth and Eleventh Circuit Courts of Appeal, has refiled its request for the Supreme Court hear the case. In June, the Supreme Court declined an earlier request to review the Sixth and Eleventh Circuit decisions in favor of the FCC. However, the Fifth Circuit’s July 24 decision finding the contribution system unconstitutional creates a split among the circuits and “a textbook example of ‘intervening circumstances of a substantial … effect,’” the group said. In its decision, the Fifth Circuit remanded the issue back to the FCC for further consideration, and as of now Universal Service continues to operate normally.