TEXAS – Companies receiving state and federal Universal Service Funds (USF) must pay federal income tax on those funds, according to a judgment from the Fifth Circuit earlier this month.
The appellate court upheld a summary dismissal from the U.S. District Court for the Western District of Texas against AT&T on a claim for the refund of more than $500M in income taxes paid to the Internal Revenue Service. The carrier maintained that more than $1.5B in state and federal USF contributions received between 1998 and 1999 should not be subject to federal income tax.
AT&T argued that contributions from the USF, which subsidizes affordable telephone service, should be considered non-shareholder contributions to capital rather than gross income. Gross income is subject to regular income tax rates while non-shareholder contributions are not. In rejecting AT&T’s claim, the court looked to the Government’s intent to supplement “lost revenues” the carrier incurred by providing service to high-cost and low-income subscribers.
Experts Concerned About Connectivity After Emergency Broadband Benefit Fund Runs Dry
April 1, 2021 – Experts are concerns about the long-term implications of the $3.2-billion Emergency Broadband Benefit program (EBB) running out of money without a plan for what happens after.
The fund, created by Congress in December, provides up to $50 in a monthly internet discount for families and $75 for tribal lands to access broadband internet. The fund will cease when all the money is used up or within six months, whichever happens sooner.
Clare Liedquist Andonov, principal at Herman and Whiteaker, LLC, said Wednesday during the CCA mobile carriers show that if all people on Lifeline — an older FCC program that provides monthly discounts for eligible low-income subscribers for internet and telephone services – subscribe to the fund, the money will “be exhausted within about four months.”
John Nakahata, partner at Harris, Wiltshire and Grannis LLP, said both the EBB and Emergency Connectivity programs are simply short-term stimulus plans that are not designed to last long.
Andonov said she is concerned about what happens after such funding ceases to exist. “What happens after four months?” she asked. “Do you disconnect those people?” She said the infrastructure built to connect people online in the first place would go to waste if the EBB program ceased operations in a matter of months, alongside the administrative costs to run the program.
To combat the expenditure of EBB funding in the mere four months projected by Andonov, Senator Amy Klobuchar, D-MN), co-chair of the Senate Broadband Caucus, and House Majority Whip James Clyburn, D-SC, introduced comprehensive bicameral broadband infrastructure legislation on March 12 to expand access to affordable high-speed internet for all Americans.
“In 2021, we should be able to bring high-speed internet to every family in America — regardless of their zip code,” said a press release from Klobuchar’s office. “This legislation will help bridge the digital divide once and for all.” If passed, Cole said it would allow the EBB program to last for an entire year; but even then, one year is not enough, they say, as broadband should be accessible for people indefinitely.
To address this challenge, there is some $100 billion set for recently-introduced broadband infrastructure bills being considered in Congress. That money is spread between three bills that would change the nation’s definition of served and unserved people with broadband by dramatically upping the threshold for broadband speeds.
Sen. Ed Markey Celebrates Telecom Act as Telecom Lawyers Tell Congress to Be Specific
February 2, 2021 – Democratic Sen. Ed Markey’s communications policy focus this Congress will be on net neutrality, children and climate change, the long-serving Massachusetts lawmaker said at a Federal Communications Bar Association event Tuesday to celebrate the 25th anniversary of the Telecommunications Act.
Reminiscing on the 1996 landmark legislation during his keynote, Markey focused on broadband accessibility and affordability, especially for children. He praised the Federal Communications Commission’s E-rate program, which subsidizes broadband access for schools and libraries.
But Markey also linked broadband to concern about climate change, highlighting the concern about how miles of broadband cable conceivably could be under the sea due to receding coastlines.
Most of all, he pushed on net neutrality. He said it was a major issue, and much-needed to prevent big companies from stifling smaller competition or consumers’ access to the internet.
Senator Markey’s remarks led into a panel discussion about the impact of the Telecommunications Act since it became law.
During that discussion, former FCC Commissioner Michael O’Rielly said that Congress needed to be more specific about what it does or doesn’t want the FCC to do. Too little specificity can lead the FCC to write bad rules that Congress doesn’t like.
John Nakahata, who worked for FCC Chairman Reed Hundt at time of the Telecom Act’s passage, agreed. Too much ambiguity by legislators has caused huge headaches for the FCC. For example, the very issue of net neutrality exists because of uncertainty about whether broadband should be classified as a Title II telecommunication service: It wasn’t, and then it was under former president Barack Obama, and then it wasn’t again.
O’Rielly said that more leeway was granted to the FCC in the past because Congress had faith in their ability to enact legislation. But legislators’ trust in the FCC has eroded.
Randolph May, president of the Free State Foundation, said that FCC regulation should look like antitrust law. He said it should be through incentives that competition is promoted, rather than through Title II regulation.
Former FCC chief of staff Ruth Milkman expressed desire to see funding for FCC programs, such as the E-rate program, used to maximum benefit where they are needed most.
The panelists agreed that legislation needs to address where technology is headed, rather than looking backward to solve past problems.
With Universal Service Fund Contributions at 32 Percent, Experts Debate Its Sustainability
January 29, 2021 – With contributions into a program intended to extend basic telecommunications services to all Americans now adding an additional 32 cents on top of every dollar of telecommunications service, experts on January 15 debated whether, and how, the Universal Service Fund can be sustained.
There seem to be two proposed solutions to what all agreed was an untenable status quo: First, Congress could appropriate USF out of general revenues. Alternatively, mandatory contributions into the USF could be broadened beyond voice telecommunications services and begin to level fees on broadband internet.
Either way, change seems to be coming, said the four panelists mulling the program at a forum convened by the Federal Communications Bar Association.
Currently, the USF program only requires telecommunications and voice-over-internet protocol providers to collect a percentage of revenues. That percentage amount is set quarterly by the Universal Service Administration Company, a non-profit entity that has been delegated this task by the Federal Communications Commission.
The USF fund administered by USAC pays for programs that expand telecommunications and broadband to rural areas, and also to lower-income Americans, schools and libraries, and rural healthcare.
Now there is a 31.8 percent fee added to all voice telecom bills
In December, the FCC released a public notice that the January through March 2021 contribution was 31.8 per cent of user revenues, a new record. Companies can decide whether to pay it from their own reserves or pass it on to subscribers.
Many agree the program, which is runs about $10 billion per year, is unsustainable. That’s particularly so with voice service revenues declining.
Chris Nelson, vice chairman of the South Dakota Public Utilities Commission, said taxing broadband service would be acceptable because “we tax everything else.” He alluded to the taboo call for taxing the internet and said that he struggled to make sense of it. He argued that a higher number of landline telephone users are elderly. It doesn’t make sense to charge them more, he said.
Nelson, who is part of a bipartisan organization that has been pressing for USF reform for years, said a hybrid model would work best. That is, half of the contribution can come from residential connections (at a cost to the customer about 55 to 60 cents) and the other half can come from enterprise, at about 8 percent of revenues.
Part of the reason for the increase is what some see as the inverse relationship between telecom revenues and the contribution — as telecom revenues decline, the relative contribution amount increases. John Windhausen, executive director of the Schools, Health and Libraries Broadband Coalition, said telecom revenues have declined from $67 billion at one point to $34 billion, pointing primarily to the decrease in wireless revenues over the years. Windhausen estimated that expanding the USF base to include broadband revenues would push the contribution down to 2.5 per cent. That won’t affect broadband adoption, he said.
“Including the broadband revenues into the base provides a more stable funding base, so the base of broadband revenues and telecom revenues together is increasing, and there’s even the possibility that the contribution factor would come down in the future as the base of broadband revenues continues to increase,” Windhausen said.
Windhausen added that Congress can supplement this proposed model with appropriations, but said that an appropriation model shouldn’t wholly replace the current fund.
Some say that the revolving Universal Service Fund should be replaced by congressional appropriation
On the flip side, some are clamoring for congressional appropriations, which proponents argue would allow for more stability from broad taxation and would open up the fund to more legislative oversight. AT&T and former FCC chairman Ajit Pai have pushed for this model.
Earlier in January, Pai suggested $50 billion from the record-setting windfall of the ongoing C-Band spectrum auction should be put into the USF for the next five years.
Mary Henze, assistant vice president of federal regulatory affairs at AT&T, doubled-down on this model as a panelist. She said the USF should move to have a congressional budget line item. That was a position also supported by Daniel Lyons, professor at the Boston College Law School who teaches telecom law. He has historically pushed that position, he said.
Lyons said the program would be subject to direct congressional oversight, which would address any fraud or abuse issues in the existing system through inquiries and hearings. He also said direct appropriations would avoid the “market distortions” of trying to tax some goods and not others to fund the program, such as a surcharge on connections or broadband service.
“They encourage strategic behavior by consumers,” said Lyons, referring to efforts to make communications services fall outside the jurisdiction of the FCC.
Henze said part of solving the market distortion problem is to bring technology companies into the base to spread the contribution out further so it is ultimately less harmful to individual companies or consumers.
The timeline for taxing broadband would also be a problem, Henze argued. Whereas she said it could take companies another year to make that adjustment, Congress, which is now be controlled by Democrats, can quickly put appropriations on budget. Windhausen suggested potentially asking Congress to give the FCC a deadline to come up with a new contribution mechanism in 18 months.
Opponents of making it a congressional budget item included Nelson. He conceded that his opposition come down to politics: Turnover of members of Congress could mean radically different views on appropriations from year to year.
If your company has any questions regarding the steep hike in USF contribution factor or would like to engage in a Communications Taxes & Fees “Optimization” to potentially minimize the economic impact of the ever-skyrocketing Federal USF contribution costs and end user pass-through surcharges, please contact Jonathan S. Marashlian of The CommLaw Group at firstname.lastname@example.org or 703-714-1313.
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