In a case that will likely end up in the Supreme Court, the Fifth Circuit has held that the “universal service” tax that appears on cell phone bills violates Article 1, Section 1, of the U.S. Constitution.

Under the Telecommunications Act of 1996, Congress delegated its taxing power to the Federal Communications Commission, which then subdelegated the taxing power to a private corporation. The private corporation then relied on for-profit telecommunications companies to determine how much taxpayers would be forced to pay for the “universal service” tax. 

“This is the biggest news in the communications tax world in 20 years,” according to Toby Bargar, senior communications tax specialist at Avalara.  

“The Federal Universal Service Fund is administered as a regulatory assessment on communications business,” he said. “It funds FCC programs like the high-cost program to put broadband in rural areas. It goes back to the 1930s New Deal utility programs to ensure people have electricity. It provides schools, libraries, and other entities with free broadband.”

For years, the USF has been subsidized by assessments, he indicated, noting that it is run through the FCC and administered by a quasi-private agency called Universal Service Administration Company. 

“USAC sets the annual budget, and telco companies have to disclose revenue made during a specific period,” he explained. “Many state agencies handle regulatory issues this way. So, the FCC collects the Universal Service Fund from telecommunications providers, who then pass the cost on to their customers.”

“The Fifth Circuit Court of Appeals determined that this assessment is legally a tax, which is significant and controversial,” he said, “It would usually be categorized as a regulatory assessment and surcharged to consumers. The Fifth Circuit determined that USF isn’t a fee … – it’s a tax.”

The Fifth Circuit depicts this situation as the FCC delegating a tax assessment to a private agency, according to Bargar: “Congress delegates the power of taxation, first to the FCC and then to a private administration company. Per the Fifth Circuit, this volates congressional authority to levy tax, similar to the situation in Chevron.”

The case will most likely be granted certiorari to the Supreme Court, according to Bargar: “There’s a significant dissent to the Fifth Circuit decision. And it’s in the same vein of extrapolation to the Chevron case reversal, and interpretation in how far a government agency can go in delegating the collection of tax.”

The ultimate ramifications are significant, he indicated. “This case is similar to how a lot of federal programs are managed — a company reports revenues, figures out its budget, and determines what the amount of contribution will be. If USF is determined to be a tax, this has a huge ripple effect. The implications for hosting a large volume of agency-run programs are limitless.”

“If SCOTUS wants to punt this, the easy punt is to look at the issue of whether this is a tax or not,” he said. “Is a regulatory assessment a tax?  Three other circuit courts have ruled the assessment is constitutional, so that makes this case ripe for certiorari to the Supreme Court.” 

This case has been remanded back to the FCC for further action by the FCC, he noted. “They’ll most certainly file an appeal.”

In a potentially larger ripple effect, this case could challenge definitions used in the regulatory state — a host of various federally run programs by a variety of agencies operate on a similar financial basis as USF. 

“Most legal scholars look at this as a question of whether a regulatory assessment is a de facto tax,” according to Bargar. “USF is an expensive line item, and there’s a lot of money involved — about $6 billion per  year. There has traditionally been broad partisan support for the USF program to exist. Telco carriers receive a significant amount of money from these programs.”