In what one expert called "the biggest news in the communications tax world in 20 years," the U.S. Court of Appeals for the Fifth Circuit ruled recently that the Universal Service Fund (USF), a fee that appears on cell phone bills, is unconstitutional, Accounting Today reported.

"The Fifth Circuit Court of Appeals determined that this assessment is legally a tax, which is significant and controversial," said Toby Bargar, senior communications tax specialist at Avalara, in an interview with Accounting Today. “It would usually be categorized as a regulatory assessment and surcharged to consumers. The Fifth Circuit determined that USF isn't a fee. …  it's a tax."

The ruling was an en banc decision of the  appeals court, with nine judges joining the majority and seven dissenting.

Under the Telecommunications Act of 1996, Congress delegated its taxing power to the Federal Communications Commission (FCC), which then subdelegated the taxing power to a private corporation. The private corporation then relied on for-profit telecommunications companies to determine how much taxpayers would be forced to pay for the USF.

The Fifth Circuit majority depicted this situation as the FCC delegating a tax assessment to a private agency, according to Bargar: "Congress delegates the power of taxation, first to the FCC and then to a private administration company. Per the Fifth Circuit, this violates congressional authority to levy tax."

The case will most likely be granted certiorari to the Supreme Court, Bargar told Accounting Today. “Three other circuit courts have ruled the assessment is constitutional, so that makes this case ripe for certiorari to the Supreme Court," he said.

The ultimate ramifications are significant, he said.  "If USF is determined to be a tax, this has a huge ripple effect. The implications for hosting a large volume of agency-run programs are limitless." 

In a potentially larger ripple effect, this case could challenge definitions used in the regulatory state, Barger told Accounting Today, as a host of various federally run programs by a variety of agencies operate on a similar financial basis as USF.

"Most legal scholars look at this as a question of whether a regulatory assessment is a de facto tax," Bargar said. "USF is an expensive line item, and there's a lot of money involved—about $6 billion per  year. There has traditionally been broad partisan support for the USF program to exist. Telco carriers receive a significant amount of money from these programs."