APA in the crosshairs part I: USF deemed unconstitutional

The U.S. Court of Appeals for the Fifth Circuit’s July 24 decision in Consumers Research v. Federal Communications Commission, that the Universal Service Fund (USF) is unconstitutional qualifies as “momentous.”  However, the ripple effects of the ruling, which is part of a larger, but foreseeable, judicial trend, will continue to extend well beyond the telecommunications industry.  In the Consumer Research case, the Court held that this dual delegation of power is unconstitutional, as was the USF fee which is considered a tax. 

In addition to (likely) triggering a U.S. Supreme Court appeal, the decision could have impacts on U.S. jurisprudence concerning how federal agencies issue regulations via the Administrative Procedure Act (APA) and have significant implications for government revenues at the federal and state levels. This rebalancing of revenue sources will inevitably lead to major changes in indirect tax policy and fee collection requirements at the state and local levels. We could ultimately see higher sales tax rates, or even new types of taxes and new fees as a result.  

This makes the fate of the USF important for indirect tax leaders to monitor. 

The USF is a fee mechanism established by the Telecommunications Act of 1996, requiring telecommunications companies to contribute to a fund that subsidizes telephone and internet services for rural infrastructure, low-income households, schools, libraries, and rural healthcare providers.  Most telecom providers pass on the USF to customers.  

Although Congress delegated the authority to collect the USF to the Federal Communications Commission (FCC) under the 1996 Act, the FCC sub-delegated the administration of the fund to the Universal Service Administrative Company (USAC), which is a private corporation.  The USAC is responsible for calculating and deciding the quarterly USF contribution amount, which the FCC then uses to impose a fee [tax] on telecommunications carriers. Consequently, the central issue before the courts is whether the “double” delegation of regulatory power—allowing the FCC to sub-delegate fee-rate (tax) authority to a private company—is constitutional, and, therefore, whether the USF itself is constitutional. 

The non-profit group Consumers’ Research argued that the USF is unconstitutional because it qualifies as a tax, which cannot be instituted by a private corporation. Two other Circuit Courts, the Sixth and the Eleventh, found the USF to be constitutional. However, the Fifth Circuit determined that the USF is a tax rather than a fee, and that Congress improperly delegated its taxing power to the FCC (which “double-delegated” that taxing power to the USAC).  

The FCC was not pleased with Fifth Circuit’s decision. “This decision is misguided and wrong,” FCC Chairwoman Jessica Rosenworcel noted in a statement. “It upends decades of bipartisan support for FCC programs that help communications reach the most rural and least-connected households in our country, as well as hospitals, schools, and libraries nationwide…”  The chairwoman stressed that the FCC will “pursue all available avenues for review,” which is likely to include a petition to the Supreme Court for review (certiorari). 

It is important to view this decision as part of a greater and broader judicial trend. In related cases, including the Supreme Court’s June 28 Loper Bright Enterprises v. Raimonda opinion, new precedents are narrowing the application of APA and, as a result, restricting the process by which federal agencies issue regulations. In Loper, for example, the Supreme Court overturned the longstanding Chevron [Deference] doctrine, which may also upend how statutes are interpreted and enforced via regulations – a topic I’ll get to in Part II…