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Taxing Broadband?

9th Circuit Judge Sees Flexibility for States on USF Method

T-Mobile faced tough questions Tuesday from a 9th U.S. Circuit Court of Appeals panel on the carrier’s argument that states must align with the FCC’s revenue-based USF contribution mechanism. The court heard T-Mobile and subsidiaries’ challenge to a U.S. District Court for Northern California March 31 decision not to block the California Public Utilities Commission’s April 1 change to a connections-based method.

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Judge Jacqueline Nguyen highlighted the district court's finding that no case requires states to keep in lockstep with the FCC. "I think that’s right.” Communications Act Section 254(f) “plainly” gave California “flexibility to come up with its own rules so long as it’s not inconsistent,” she said at the livestreamed argument. Section 254(f) says states “may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service.”

The FCC’s 2015 and 2018 net neutrality orders required symmetry, countered T-Mobile attorney Peter Karanjia of DLA Piper. The 2015 open internet order said states assessing fees on broadband would be inconsistent with the federal regime and preempted by Section 254(f), he said. In the 2018 Restoring Internet Freedom order, the FCC rescinded net neutrality rules but stood by the previous order’s statement on broadband fees, he said.

Is the FCC a party in this case?” asked Judge Eugene Siler, visiting from the 6th Circuit. No, replied Karanjia. Judge Ryan Nelson then asked, “Do we even owe the FCC any deference?” The lawyer said the court does under the Chevron doctrine but Nelson disagreed: “We can read a statute.” Karanjia began to point to Justice Clarence Thomas’s opinion in the Supreme Court’s Brand X case that applied the doctrine and deferred to FCC interpretation of a law that could be interpreted in different ways, but Nguyen interrupted: “There’s no ambiguity here.” She said the law gives the state flexibility to make its own USF rules.

Without any appellant precedent, “the next best thing is the FCC,” insisted Karanjia. “The problem is you have a CPUC rule, which is based solely on connections, completely indifferent to the nature of the underlying services,” said T-Mobile’s lawyer. “The CPUC’s rule applies whether they’re interstate services, whether they’re intrastate services -- it doesn’t care, and that’s a real problem. That creates a direct conflict” with the FCC’s rule against taxing broadband revenue. The FCC chose a revenue-based method as the best way of advancing universal service in 1977 and 1999 orders, added Karanjia: The CPUC “explicitly rejected that position.”

"This case is not about taxing broadband,” said CPUC attorney Hien Vo Winter. “The definition that the CPUC adopted under [its] express authority under [Section] 254(f) limited the surcharge to voice telecommunications service.” The FCC’s 2015 and 2018 orders therefore have “no bearing on the analysis here.” The state surcharge wouldn’t apply to stand-alone broadband, she said. There would be a surcharge on a voice-and-internet bundle, but “the nexus is still the connection to the voice telecommunications service.” No case law says states must be in “lockstep” with the FCC on USF contribution methods, she said. “Congress gave states … express flexibility.”

Siler asked if the same issue had come up in other states. Other states adopted similar contribution methods based on access lines without being challenged in court, the CPUC attorney said. “The FCC presumably is aware and they have never made any direct statement” about whether the state policies are inconsistent with the federal regime.

It’s incorrect that the surcharge is limited to voice, said T-Mobile’s attorney in a rebuttal round. The California surcharge “kicks in so long as you’re providing some voice service, but all our companies provide voice and data and text,” with 75% of the revenue coming from data, he said. “It is a tax on broadband.”