Federal Appeals Court Rules the FCC’s Universal Service Fund Is an Illegal Tax

The seal of the Federal Communications Commission (FCC) in Washington on Dec. 14, 2017. (Jacquelyn Martin/AP Photo)

A federal appeals court has ruled in favor of a conservative nonprofit in a case that challenged the legitimacy of the way the Federal Communications Commission (FCC) administers the Universal Service Fund (USF).

The court held that because the FCC relied on for-profit telecommunications companies to determine the USF surcharge, it functions as a tax that voters did not approve and so is unconstitutional.

In a 9–7 split decision issued by the full 5th Circuit Court of Appeals on July 24, the court sided with Washington-based nonprofit Consumers’ Research, finding that the USF surcharge is an illegal tax because, even though Congress delegated taxing power to the FCC, the agency relied on private companies to set the surcharge, in violation of Article I, Section I of the U.S. Constitution.

“In the Telecommunications Act of 1996, Congress delegated its taxing power to the Federal Communications Commission,” the majority opinion states. “FCC then subdelegated the taxing power to a private corporation. That private corporation, in turn, relied on for-profit telecommunications companies to determine how much American citizens would be forced to pay for the ‘universal service’ tax that appears on cell phone bills across the Nation. We hold this misbegotten tax violates Article I, § 1 of the Constitution.”

The nondelegation doctrine is the theory that Congress, which is vested with “all legislative powers” by Article I, Section I of the Constitution, cannot delegate that power to anyone else.

Several of the dissenting judges argued that the majority mischaracterized the U.S. Supreme Court’s precedents for separation of powers cases and that the decision leaves the political branches “powerless to govern.”

“This convergence sleight of hand not only undoes Supreme Court precedent but also leaves the political branches powerless to address this perceived constitutional deficiency, ignorant as to how to legislate and regulate in ways that will survive judicial review,” wrote Judge Carl Stewart in dissent.

Trent McCotter, a partner at Boyden Gray PLLC, the law firm representing Consumers’ First, praised the ruling.

“The en banc Fifth Circuit just GRANTED our petition for review and held that the FCC’s Universal Service Fund VIOLATES the nondelegation doctrine--a great victory,” he wrote in a post on X.

The FCC did not immediately respond to a request for comment on the decision.

In light of the ruling, the FCC could ask Congress to fund the USF as a direct appropriation, as has been recommended by the U.S. Chamber of Commerce, AT&T, and a number of trade industry organizations.

USF is a program funded by fees and surcharges that spends billions of dollars to subsidize schools, libraries, low-income households, rural service zones, and high-cost areas. It covers discounted internet service for low-income families and public schools and libraries, and is used to complete the buildout of broadband networks in remote areas.

Proponents of USF maintain that ending the program will widen the “digital divide” for under-represented communities that have less access to technology.

Will Hild, Consumers’ Research executive director, told The Epoch Times in an earlier interview that the organization he helms didn’t object to the intent of the program, though it and others that backed the lawsuit did take issue with the way it’s funded and the lack of transparency.

“It’s an unconstitutional delegation,” Mr. Hild told The Epoch Times on May 15, “because Congress has to set the rates.”

Mr. Hild added that USF rates, which are only collected through phone service even though the revenue goes to internet programs, have increased substantially in recent years.

“It’s an accountability issue,” Mr. Hild said. “Power has to lie with the people who can be replaced.”

Aaron Gifford contributed to this report.