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Commission considers taxing broadband service

The FCC is studying a proposal to tax broadband Internet service, an issue that has been discussed previously but is now gaining momentum in Congress. The proposal is designed to generate money for the Connect America Fund, a subsidy created from the Universal Service Fund in 2011 to expand Internet access to rural and underserved areas. The commission requested comment on the new tax last April.

An additional fee on landline and cell phone bills currently funds the Connect America fund. Alternative proposals at the commission include taxing text messages, or levying a flat fee on each phone line instead of taking a percentage of fees associated with interstate phone calls.

Julius Genachowski, the FCC Chairman, called the existing contribution system outdated and inefficient. “Today we propose three goals for contribution reform: efficiency, fairness and sustainability,” he said.

Genachowski added that “any reforms to the contribution system must safeguard core Commission objectives, including the promotion of broadband innovation, investment and adoption.”

It appears the FCC faces a major hurdle in establishing a new tax. A law passed in 1998, the Internet Tax Freedom Act, prohibits the government from taxing Internet access, a move intended to boost broadband subscriptions. However, the commission borrowed a line from the U.S. Supreme Court’s Obamacare ruling, and called the Universal Service Fund contributions “fees,” not “taxes.” Whether this would hold up in court is unclear.

Google, Sprint and AT&T have agreed with the proposal for taxation. Google argued that the current market conditions “strongly supports expanding the [Universal Service Fund] contribution base to include broadband Internet access services.”

However, Google suggested that taxing email or Google Voice might not be the best way to generate the funds as “saddling these offerings with new, direct USF contribution obligations is likely to restrict innovative options for all communications consumers and cause immediate and lasting harm to the users, pioneers, and innovators of Internet-based services.”