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A Taxing Problem With DSL

Is the Universal Service Fund charge justified? The battle cry of the American Revolution was “No Taxation Without Representation.” It’s so deeply rooted in the country’s psyche that when the District of Columbia was casting about looking for a slogan for its license plates, it hit upon the fact that it does not fall within any state, and therefore cannot vote for its own senators or representatives. They came up with the surprisingly bitter and militant phrase Taxation Without Representation. You can see it on a goodly number of license plates in our nation’s capital.

But this slogan could equally well apply to your local phone company, which, as likely as not, is also your local DSL supplier. If you pay your phone bills and DSL bills without close examination, you’ll probably not have noticed this, but there’s a little surcharge that’s sometimes not so little that the company has been passing on to its customers for years. It’s called the Universal Service Fund or USF, and it’s a charge that the FCC levies on any company that provides cross-state communications. Since the Telecommunications Act of 1996, it’s also been levied on DSL providers.

Notice that I mentioned that it’s a charge that a government body levies on a corporation, because that’s not what it’s listed as on your communications company bill. It’s listed at the bottom with all the legitimate taxes that you’re used to paying. But it was never intended to be a tax; that’s just the way the telcos have made it look. And by making it a surcharge, they can advertise DSL service for $37.50 (which of course amounts to $40.89 with taxes) and actually bill you $42.51.

Because everybody in the United States is used to ignoring the small print at the bottom of their phone bills, the telcos have gotten away with passing on the USF fee since time immemorial and DSL providers have done the same for a decade. By some definitions, this process is tantamount to levying a tax on their customers to pay their own tax bill (and of course, ordinary citizens have no representation within a corporation).

Although consumer groups have been kvetching about it for years, the telcos haven’t actually run afoul of the law. That is, not until this summer, when things took an abrupt turn with a new ruling from the FCC.

A Quick Legal Primer

The Communications Act of 1934 put forth the proposition that because all men were created equal, they should have equal access to a reasonably price nationwide communications network. To make this possible, the law created a Universal Service Fund, which was to be funded by the providers of the national communications service, and which would cover the creation of communications infrastructure in isolated rural communities and urban poor communities…in short, anywhere that a corporation would consider it unprofitable to lay its cable.

The Telecommunications Act of 1996 expanded the original Act’s scope from 1934-era technology to include good old Ethernet- and IP-based Internet communications, and expanded the mandate to provide Internet and phone services to libraries and schools.

On Aug. 14, the FCC, which manages the fund, reworked it definition of a company that provides interstate communication. That definition excluded DSL companies. In short, the Verizons and Bell Souths of the world were no longer required to pay into the Universal Service Fund.

When is a Tax Not a Tax?

Almost immediately after the FCC made its announcement, Verizon and Bell South issued their own. Broadly speaking, they told their customers “Your bill stays the same. We’re just going to call the surcharge something different.”

Before August, Verizon DSL customers at 768Kbps paid about $1.25 into the USF every month and 3Mbps customers footed a $2.83 charge. BellSouth customers were charged $2.97 per month. In August, Verizon added a “supplier surcharge” that amounted to slightly less than the USF charge (a nickel less at 786Kbps and 13 cents less for high speeds). BellSouth said it would keep its $2.97 fee the same, and continue to call it a “regulatory cost recovery fee.”

Within two weeks, the FCC raised a red flag. The FCC’s commissioner Michael Copps went on record in a Reuters news report saying “When the FCC phases out a fee and a major broadband provider rushes in to replace it with a new company surcharge, consumers get burned.”

To stave off any government probe, BellSouth relented on Aug. 25 and issued a statement saying it would drop its surcharge and make it retroactive to the day after the FCC released the company from its USF fee. Verizon was slower to react, and got an FCC nastygram saying, in part, “The bureau is investigating whether Verizon’s practices are consistent with the obligations set forth in the commission’s Truth-in-Billing rules.” The letter required a response within 20 days, but that was too late for the deadline on this column.

So as of now, I don’t know whether Verizon will cave and drop its surcharge or manage to justify it to the government. One thing’s for sure: They’ve ticked off a lot of their customers.

Read My Lips: No More Surcharges

Verizon and Bell South could have kept its customers’ goodwill (and its revenue stream) if it had been more honest in the first place. If they’d quoted 3Mbps DSL at a monthly rate of $39.75 and added only legitimate taxes on top, the consumer would have paid the same grand total of $42.83 per month and the FCC wouldn’t have come sniffing around.

As it is, Verizon has come across as petulant for finger-pointing at the government for charging them a USF fee in the first place, and greedy for adding their own surcharge when the government freed them from it.

So Verizon, do yourself a big favor: Quote us a straightforward price from the outset. If your costs go up for any reason, including any corporate tax the government levies against you, don’t use surcharges. Raise your base price the way regular companies do. No customer likes price hikes, but we like deception even less, and sneaking your own personal corporate tax on us seems, well, just plain un-American.

Contributing Editor Matt Lake writes SOHO Advisor monthly for ComputerUser.

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