Taxes and Surcharges for Telecommunications
reprinted from “No Jitter”, September 27, 2022
On almost all telecom bills, there’s a section called something like “fees, taxes, and surcharges,” which customers pay in addition to the services that they are contracted for. These fees are rarely (if ever) discussed during negotiations for new services with telecom vendors. But as a telecom manager responsible for budgeting for services, these additional fees are an important and significant part to be considered during the overall cost analysis. These taxes and fees can add an additional 50% or more to the cost of the contracted services—they are not usually negotiable—and can be variable over time . When negotiating for new services, ask the vendor to provide a sample bill that includes taxes and surcharges. This total is what you need to budget for.
Taxes are levied by various government entities at all levels of government. This could be city taxes and surcharges, county taxes and surcharges, state taxes and surcharges, as well as other charges municipalities may impose to fund specific civic projects such as school, libraries or rural health care initiatives.
The most notable fee to look at in any telecom bill is the Federal Universal Service Fund (USF) fee. This is a fee charged to the telecom service providers by the Universal Service Administrative Company (USAC), an agency of the Federal Communications Commission (FCC).
This fund was established to collect and deliver funding through four programs focused on places where broadband and connectivity needs are critical.The federal USF pays for four programs. They are:
- Lifeline/Link Up: This program provides monthly discounts to qualifying low-income consumers for voice and broadband services on tribal and non-tribal lands.
- High-Cost: This program ensures that consumers in all regions of the nation have access to telecommunications services at rates that are affordable and reasonably comparable to those in urban areas.
- Schools and Libraries: This program makes discounts available to eligible schools and libraries for eligible telecommunications services, Internet access, and internal connections so that schools and libraries may have access to affordable telecommunications and information services.
- Rural Health Care: This program seeks to improve the quality of health care available to patients in rural communities by ensuring that health care providers serving those communities have access to telecom and broadband services.
The USF rate is calculated and adjusted quarterly based on the needs of the USAC to fund the various programs at that time. The current rate for the quarter of July – September 2022 is 33% of eligible services (up from 23.8% the previous quarter). This is the highest rate since the beginning of the program. The rate for the 4th quarter of 2022 is 28.9%, but the trend continues to be upward.
All service providers of telecommunications must contribute to the Federal USF based on a percentage of their interstate and international end-user telecommunications revenues. These companies include wireline phone companies, wireless phone companies, paging service companies, and certain Voice over Internet Protocol (VoIP) providers. The carriers are then able to pass this fee on to their end users. To be clear: the telecom provider is for paying the fee to the USAC, and the telecom provider can pass those fee charges along to their customers. Some of the provider’s end users may be exempt, but generally speaking, Federal USF fees are passed on and paid by end users, as covered by the customer contract. It is possible for organizations to request to be exempt from the FUSF, but if you go that route, be prepared for a lengthy and time-consuming effort . The exemption process needs to start before the contract is signed by the customer, and the contract needs to be specific, stating that the customer is exempt.
It is also important to note that not all telecom services are subject to the USF. In general, if more than 10% of the traffic is interstate (including internet and international traffic), then the USF will be applied.
States can also impose similar fees on telecom vendors. These also get passed on to the end user. Texas has recently initiated a Universal Service Fund fee of 24% on eligible services (up from 3%).
Here’s an example of how additional fees affect your monthly communications costs. If your company is evaluating a new voice service that includes 500 VoIP seats at $30 per seat, the monthly recurring cost will be $15,000. The USF fee will be $4950, and state and local taxes could be an additional $3000 or more (a lot more if you are in Texas). So, the total cost would be at least $22,950 a month, or 53% over the $15,000 monthly recurring cost. Telecom managers should plan on and budget 50% of the services for taxes, fees, and surcharges. Future changes in the USF are unknown, and the trend is that it will continue to increase. Although there is little that can be done about these charges, it is worthwhile to monitor them and budget for increases in the future.
When the USF was in the 5% area, it was a nuisance. Now that it has increased to 33% (and is expected to continue to increase), it is a significant element in a company’s telecom expense.