Is a telephone company's Universal Service Fund (USF) surcharge passed on to customers subject to Texas sales tax?

Plain-English summary

A telephone cooperative that owns a cellular phone subsidiary asked the Comptroller whether the federal Universal Service Fund (USF) assessment — which the FCC imposes and the company passes on to its customers as a reimbursement, effectively a rate increase — is subject to Texas sales tax and the Texas Infrastructure Fund assessment.

The Comptroller's answer: the USF assessment is legally imposed on the carrier, not directly on the subscriber. So when the carrier passes that cost through to its customers, the resulting charge is simply treated as part of the sales price of the telecommunications service itself, and is taxed in exactly the same way the underlying service is taxed — there's no special carve-out for a pass-through regulatory fee.

What this means for you

Telephone and cellular carriers

If you pass federal regulatory assessments like the USF fee through to customers as a separate line-item charge, don't assume that line item is tax-exempt just because it originated as a government-imposed fee on you rather than a service charge — Texas treats the reimbursement as part of the taxable sales price of the underlying telecom service.

Accountants and tax professionals

This is a useful, simple illustration of the general "sales price" principle: a cost pass-through that's legally imposed on the seller (not the buyer) doesn't escape tax just by being itemized separately — it's still part of what the customer pays for the taxable service.

Common questions

Q: Is the USF fee itself taxed, or is it the underlying phone service that's taxed?
A: Per this letter, the USF reimbursement charge is treated as part of the sales price of the telecom service — it's taxed the same way the service itself is taxed, not as a separate item.

Q: Does it matter that the USF fee is technically imposed by the federal government, not the carrier?
A: No, per this letter — because the assessment is made against the carrier (not directly against the subscriber), the pass-through charge to the customer is just part of the service's sales price.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9805729L

Original ruling text

May 18, 1998

Dear Mr. **:

Thank you for your recent letter which is restated in part with response below.

My company is a Telephone Cooperative which owns a subsidiary who provides
cellular phone service. The Federal Communications Commission has imposed a
universal service fund contribution assessment which we can pass on to our
customers. My question is, since this assessment is in effect a rate increase,
are the amounts of this reimbursement we collect from our customers subject to
Sales Tax and the Texas Infrastructure Fund assessment?

Response: The Universal Service Fund (USF) assessment is made against the
carrier and not directly against the subscriber. Accordingly, a charge for USF
reimbursement is part of the sales price of the service itself and is subject
to sales tax in the same manner as the service.

This opinion is rendered based on the facts presented. If there are additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division