On October 26, the Washington Supreme Court heard oral arguments in Assurance Wireless USA v. State of Washington Department of Revenue. At issue in the case is Washington State's attempt to impose retail sales tax obligations on Assurance for providing wireless services to individual participants in the Lifeline program. The parties disagree over the Assurance's provision of wireless services to individuals is a taxable sale. The Lifeline subscribers do not pay Assurance for the service, and Assurance claims that the FCC is the buyer of Lifeline services because payment to Assurance comes from the FCC via the U.S. Treasury and that the transaction is therefore immune from state taxation. But the State argues that the Universal Service Administrative Company (USAC) is the buyer of the wireless services for Lifeline users, and thus as a private corporation – and not, it is argued, a federal instrumentality – the transactions are not immune from taxation.
According to Assurance's supplemental brief:
Unlike a federal contractor, USAC is so interconnected with the FCC's function of universal service that the two cannot realistically be viewed as separate. USAC was created at the FCC's direction. Pet. 22. USAC has no funding apart from the USF, and the FCC approves its quarterly administrative budget. 47 C.F.R. § 54.423. The FCC prescribes each of USAC's functions and the rules under which it carries out these functions. USAC must report the amounts of money disbursed for Lifeline to the FCC on a quarterly basis. 47 C.F.R. § 54.702(h). Such reporting must comply with federal financial management statutes. 47 C.F.R. § 54.702(n). The FCC appoints and/or approves all USAC’s board members. 47 C.F.R. § 703(c)… For purposes of federal laws, courts have noted the FCC's control over USAC is so integrated that USAC should be treated as the government… If USAC does not "stand in the shoes" of the FCC when it performs mere ministerial tasks at the FCC’s behest, no private entity would ever be treated as an instrumentality. Pet. 26. No court has overruled the longstanding precedent which extends tax immunity to federal instrumentalities. See Rev. Rul. 57-128, 1957-1 C.B. 311 (listing factors that the I.R.S. uses to determine if entities are instrumentalities of states for purposes of the federal taxation).
But the Washington Department of Revenue views the USAC differently:
[T]he U.S. Supreme Court has narrowed the concept of an "instrumentality" of the federal government. In order for the courts to confer tax immunity on a private entity, that entity must be "incorporated into the government structure." New Mexico, 455 U.S. at 737 (internal quotation marks omitted). Or, stated slightly differently, the private entity must be "'so assimilated by the Government as to become one of its constituent parts.'"… Congress has not conferred tax immunity on the USAC, and Assurance does not argue otherwise. Moreover, imposing a state retail sales tax on goods or services purchased by the USAC in no way interferes "with the functions of [the federal] government itself." New Mexico, 455 U.S. at 736… Instead, the USAC is a wholly-owned subsidiary of a trade association that has been given the responsibility to "collect, pool, and disburse the universal service support funds contributed by carriers." Incomnet, 463 F.3d at 1067. Moreover, the USAC has expressed publicly that it is not "a federal government agency or department or a government controlled corporation." CP 299. Likewise, the FCC has publicly acknowledged that the USAC "is a private corporation, not a public entity." Report on the Future of the Universal Service Fund, FCC 22-67 at *41 ¶ 117, 2022 WL 3500217 (F.C.C. 2022) (citations omitted). Because the USAC is a private corporation and not a federal entity, members of its board of directors are not required to be nominated and appointed by the President of the United States under the Appointments Clause of the federal constitution. Id.
There is no timeline on when Washington Supreme Court will make its decision. However, I favor the view that the USAC is a federal instrumentality and thus immune from taxation.
Free State Foundation President Randolph May and I address a broader set of structural issues regarding universal service – including programs such as Lifeline – in our April 2021 Perspectives from FSF Scholars, "Congress Should Put Universal Service on a Firmer Constitutional Foundation." And in August of this year, FSF President May and I submitted public comments with Universal Service Fund Working Group led by Senators Ben Ray Lujan and John Thune.
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