TITLE:   Universal Service Fee Surcharge, B-279796, January 4, 1999
BNUMBER:  B-279796
DATE:  January 4, 1999
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Universal Service Fee Surcharge, B-279796, January 4, 1999

Decision

                    Matter of: Universal Service Fee Surcharge

File: B-279796

Date: January 4, 1999

DIGEST

1. Telecommunications vendors charge the Army a Universal Service Fee to
recover the vendors' universal service contributions, required of
telecommunications carriers by federal law. Because the universal service
contributions arise as a result of federal, not state, law, the federal
government's constitutional immunity from state and local taxation does not
arise, and would not prohibit payment of the fee.

2. A pending legal challenge to the requirement of the Telecommunications
Act of 1996 that telecommunications carriers make universal service
contributions does not compel a conclusion that the Army may not pay
Universal Service Fees assessed by carriers to recover, as a cost of doing
business, the amounts of their contributions. Presently, no court has held
the fees to be illegal, and the United States is vigorously defending the
legality of the requirement.

DECISION

A disbursing officer of the Army at Fort Sam Houston has requested an
advance decision concerning the propriety of paying a Universal Service Fee,
a surcharge that communications vendors have added to Fort Sam Houston's
invoices for telecommunications services. Although this matter is
complicated by pending litigation, we have no objection to the Army's
payment of the fee if payment is required by its existing contracts and is
consistent with the carriers tariff.

Background

The Telecommunications Act of 1996 requires that "every telecommunications
carrier that provides interstate telecommunications services shall
contribute . . . to the specific, predictable, and sufficient mechanisms"
established by the Federal Communications Commission (Commission, or FCC)
"to preserve and advance universal service." Pub. L. No. 104-104, sect. 254(d),
110 Stat. 56, 71-73 (1996). The Act defines "universal service", generally,
as a level of telecommunications services that the Commission establishes
periodically after taking into account various considerations, including the
extent to which telecommunications services are essential to education and
public health and safety. Id., sect. 254(c)(1). The Commission uses the
carriers' universal service contributions to subsidize services to low
income consumers, as well as advanced telecommunications for schools,
libraries, and rural health care providers.

The Commission bases contributions on the carriers' end-user revenues. The
carriers calculate their contributions by multiplying their end-user
revenues by the universal service contribution factor set by the Commission.
Although the Commission has specifically declined to direct the carriers to
recover their contributions through a surcharge on their customers, it did
not prohibit surcharges. Federal State Board on Universal Service, Report
and Order, 12 F.C.C. Rcd. 8776, 9211-12 (May 8, 1997). A number of carriers
have chosen to impose them in order to recover from customers, as a cost of
doing business, the amounts of their contributions.

Referring to the Commission's decision not to require carriers to pass their
contributions on to customers through surcharges, the disbursing officer
asks whether he may pay the surcharge, or Universal Service Fee, assessed
Fort Sam Houston by its communications vendors. Noting our decisions
addressing 9-1-1 emergency telephone surcharges, he questions whether the
federal government is exempt from paying the surcharge, which he compares to
the 9-1-1 surcharges, as a tax assessed against customers.

Analysis

Our 9-1-1 decisions are inapposite here. The 9-1-1 cases involved taxes
assessed under state law. The United States and its instrumentalities are
immune from direct taxation by state and local governments. U.S. Const. art
VI, cl. 2. Hence, in our 9-1-1 decisions, we found the federal government,
as a consumer, exempt from paying state and local taxes assessed directly
against the United States as an end user. See B-265776, Nov. 29, 1995;
B-254628, Apr. 7, 1994; B-254712, Feb. 14, 1994. (On the other hand, when a
state or locality assesses a tax against a provider who simply passes that
amount on to its customers as an added cost of business, the federal
government may pay its provider the costs the provider charges. Id.) Because
the Universal Service Fee at issue here is intended to recover the carriers'
universal service contributions established under federal, not state, law,
constitutional immunity does not arise, and would not prohibit payment of
the fee.

This matter is complicated by pending litigation in which carriers challenge
the constitutionality of the Commission's action requiring universal service
contributions. A number of carriers, along with several states, have
petitioned the Fifth Circuit Court of Appeals for review of the Commission's
order. Texas Office of Public Utility Counsel v. FCC, No. 97-60421 (5th
Cir., filed June 25, 1997). Among the arguments raised is that the
contributions required by the Commission represent an unlawful tax and that
the Congress exceeded its constitutional authority in delegating taxing
power to the Commission. In the litigation, the United States asserts that
the universal service contribution does not constitute a tax, but merely a
mechanism to preserve and advance universal service. Fourth Order on
Reconsideration in CC Docket No. 96-45, Report and Order in CC Docket Nos.
96-262, 94-1, 91-213, 95-72, FCC 97-240 at para. 262 (Dec. 30, 1997). That
litigation is pending before the Fifth Circuit. [1]

The pending legal challenge to the requirement that carriers make
contributions does not compel a conclusion that the Army (or other agency)
may not pay the fees assessed customers by the carriers as a cost of
providing telecommunications services. The United States, in reply to the
carriers' arguments, vigorously maintains the legality of the requirement.
Nor may we presume the unconstitutionality of a congressional enactment.
U.S. Const., art. I, sect. 8. Currently, no court has held that the carriers'
universal service contribution is an unconstitutional tax. We will not
conclude that agencies of the United States may not pay a fee because of the
pending legal challenge to the contribution that the carriers intend that
fee to recover. Accordingly, we have no objection to the Army's payment of
fees, such as the Universal Service Fee, that carriers assess to recover the
amount of their contributions, if payment of such fees is otherwise required
by its contracts with its carriers and consistent with the carriers tariff.
[2]

We recognize the possibility that the Fifth Circuit may agree with the
carriers and reverse the Commission's order requiring the carriers to make
the contributions.

The possibility of the court, in the future, agreeing with the carriers, and
the resulting possibility of refunds of Army payments to the carriers, would
not by itself subject the disbursing officer to liability for having made an
improper payment. As long as the fee is otherwise properly payable at the
time the officer makes payment, he may do so without concern as to the
outcome of the pending litigation and the resulting consequences.

Comptroller General
of the United States

Notes

1. See GAO/RCED/OGC-98-172R, May 1998, which summarizes the arguments raised
by the various parties to the litigation.

2. As a basic proposition, appropriated funds are only available to pay
lawful obligations of the United States. 31 U.S.C. sect. 1301(a). Thus, if the
Army's contract does not obligate it to make these payments, or if such
payments are not consistent with the carrier's filed rates, see American
Broadcasting Companies, Inc. v. FCC, 643 F.2d 818, 819 (D.C. Cir. 1980), RCA
Global Communications Inc. v. FCC, 717 F. 2d 1429, 1430 (D.C. Cir. 1983),
appropriated funds would not be available to make these payments. Given the
general nature of the questions posed, we are not in a position to factually
resolve any contract and tariff issues.