5th Circuit Rules FCC’s Universal Service Fund Is an Unconstitutional Tax

The Fifth Circuit Court of Appeals recently held that the FCC’s universal service fund (USF), a broadband subsidy, violates Article I of the Constitution, which vests all legislative powers, such as taxing power, to Congress. 

Congress authorized the FCC to create “mechanisms to preserve and advance universal service” in the Telecommunications Act of 1996.  Pursuant to that authority, the FCC created the USF, to which the FCC requires interstate telecommunications carriers to contribute a set quarterly amount.  The FCC relies on a third party, an independent non-profit corporation, to administer the USF programs and determine quarterly contribution amounts for carriers. 

In reaching its holding, the Fifth Circuit determined that the USF contribution is properly categorized as a tax rather than a fee.  The Court noted that while Congress may delegate its legislative taxing power to federal agencies under certain circumstances, Congress may not do so without supplying a sufficient intelligible principle to guide agency discretion.  Here, the Fifth Circuit ruled, Congress imposed only a single restriction on the FCC’s authority—that the contribution amount be affordable—which does not equate to an intelligible principle.  As a result, Congress’s delegation to the FCC violates the separation of powers principles in Article I. 

In addition, the Fifth Circuit held that the FCC’s subdelegation of congressional taxing power to a private entity was impermissible, as such subdelegation is only constitutionally permitted when the agency has and exercises final decision-making authority.  Here, the Fifth Circuit found that FCC regulations permit the private entity’s contribution amounts to take legal effect without formal FCC approval or review.  Moreover, the Fifth Circuit held, the FCC did not have statutory authority to subdelegate congressional taxing power to private entities, even for ministerial functions. 

The Fifth Circuit’s en banc decision overturned a previous ruling by a three-judge panel upholding the USF and represents a split with the Sixth and Eleventh Circuits, who have also upheld the USF.