Overtaxing: The FCC’s Broadband Tax

In April, the Federal Communications Commission (FCC) filed a request for comments on a proposal that would effectively place a tax on broadband Internet service.  This move has largely flown under the radar, but fortunately, people have begun to take notice.  Obviously, a tax on broadband Internet service would have a large impact across the country, including affecting basically every person reading this article.

Under the Telecommunications Act of 1996, the FCC can require “every telecommunications carrier that provides interstate telecommunications services” to contribute to the Universal Service Fund (USF), as well as “any provider of interstate telecommunications… if the public interest so requires.”  This provision is applied to telephone service providers.  The USF has been used historically to promote the extension of telephone service to rural areas, by requiring larger contributions from urban providers, and paying out to rural providers. 

This, historically, has not applied to Internet providers, although Internet phone and voice communications services have been included within the Act.  Broadband providers could arguably qualify as “telecommunications providers” under the definitions in the Act, and could be required to pay into the USF if “public interest so requires.”  This payment would then be passed along to the consumers, effectively, though not technically, taxing them for broadband service.

The FCC would use these funds to extend broadband coverage to a larger number of areas, almost certainly in the same manner they use the USF to extend phone service to rural areas. This would mean higher broadband prices for people living in urban areas.

This would appear to be arguably within the FCC’s authority, but a few recent developments make it a bit more complicated.  In the recent ObamaCare opinion, the Supreme Court has now established a “if it looks like a duck, and quacks like a duck, it must be a duck” approach to determining whether fees are actually taxes; this may be the new norm. 

If this is the case, the FCC runs into two main problems.  First, they have not been granted the power to tax.  Second, the Internet Tax Freedom Act Amendments of 2007 have extended the moratorium on Internet taxes until November, 2014.  This applies to both state and federal governments, and shows that not only can the government not tax the way the FCC intends here, but shows a desire by Congress not to do exactly what the FCC proposes.  The FCC exceeds its authority if it acts contrary to the will of Congress, in this case evidenced by Congress passing provisions to ensure that Internet providers are not taxed. 

With so many different angles, this could be decided either way. The Telecommunications Act has not applied to broadband in the past, but broadband could fit in its definitions.  The FCC cannot tax, but can require contributions to a fund.   These contributions, if seen as a tax, would be invalid under the ITFA, but if seen as non-tax contributions, could be allowed. The FCC’s actions go against the intent of Congress, but do not violate the letter of the Telecommunications Act.

There are a lot of policy and legal interactions here, but the FCC has the backing of some pretty heavy-hitters arguing for public policy, most notably, Google.  Obviously, it would benefit Google if more people had Internet, and Google would not be the one paying into the UFC, so perhaps this is not too surprising.  Whether the FCC is allowed to take this action remains to be seen, but it is alarming that the FCC intends to take action that is so clearly opposed to the aims of Congress by taxing broadband providers.