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October 21, 2014
Tax Consequences of Net Neutrality

Would the Federal Communications Commission expose broadband Internet access services to tax rates of at least 16.6% of every dollar spent on international and interstate data transfers--and averaging 11.23% on transfers within a particular state and locality--if it reclassifies broadband as a telecommunications service pursuant to Title II of the Communications Act of 1934?

As former FCC Commissioner Harold Furchtgott-Roth notes in a recent Forbes column, the Internet Tax Freedom Act only prohibits state and local taxes on Internet access. It says nothing about federal user fees. The House Energy & Commerce Committee report accompanying the "Permanent Internet Tax Freedom Act" (H.R. 3086) makes this distinction clear.

The law specifies that it does not prohibit the collection of the 911 access or Universal Service Fund (USF) fees. The USF is imposed on telephone service rather than Internet access anyway, although the FCC periodically contemplates broadening the base to include data services.
The USF fee applies to all interstate and international telecommunications revenues. If the FCC reclassifies broadband Internet access as a telecommunications service in the Open Internet Proceeding, the USF fee would automatically apply unless and until the commission concluded a separate rulemaking proceeding to exempt Internet access. The Universal Service Contribution Factor is not insignificant. Last month, the commission increased it to 16.1%. According to Furchtgott-Roth,
At the current 16.1% fee structure, it would be perhaps the largest, one-time tax increase on the Internet. The FCC would have many billions of dollars of expanded revenue base to fund new programs without, according to the FCC, any need for congressional authorization.

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