State Court Rules that USAC is Tax-Immune in Lifeline Case

On March 7, the Washington State Supreme Court issued its decision in Assurance Wireless USA, LP v. State of Washington Department of Revenue (2024). At issue in the case is whether funds received by telecommunications carriers participating in the federal Lifeline program are subject to Washington's retail sales tax. In a unanimous 9-0 decision, the Washington Supreme Court concluded that because the Universal Service Administrative Company (USAC) operates as an instrumentality of the federal government, imposition of the retail sales tax violates the intergovernmental tax immunity doctrine. The effect of the court's decision is that it ensures that tax burdens are not saddled on Lifeline program providers and low-income beneficiaries.

The USAC is the FCC's appointed non-profit entity for administering the Universal Service Fund and the Lifeline program. The Washington Supreme Court determined that the USAC is the "buyer" from whom telecommunications carrier and Lifeline program participating provider Assurance Wireless should have been collecting the tax. That is to say, the court determined that the incidence of the state retail sales tax falls on the USAC.

Under the intergovernmental immunity doctrine, the federal government and instrumentalities closely connected to it are immune from all forms of taxation absent express Congressional waiver of immunity. The Washington Supreme Court determined that provisions contained in Section 254(e) and 254(f) of the Communications Act do not constitute Congressional waivers. Looking to factors identified in U.S. Supreme Court jurisprudence for determining whether an instrumentality is closely related to governmental activity and therefore tax-immune, the Washington Supreme Court wrote: 

Weighing all the factors, we conclude that USAC is an instrumentality of the federal government. It exists solely to carry out the FCC's mission of advancing universal service, which includes the Lifeline program, and USAC pursues no independent business objectives. Congress has acknowledged the FCC's reliance on USAC and approved of their relationship as the means of implementing universal service programs. Further, although USAC is nominally an independent nonprofit, the FCC's regulatory control over USAC's operations, leadership composition, and finances have produced an entity so closely related to the FCC that we conclude it operates as an instrumentality of the federal government for purposes of the intergovernmental tax immunity doctrine. 

In a November 9, 2024 FSF Blog post, "State Court Weighing USAC on Tax Immunity for Lifeline," I previewed this case. I suggested that Assurance Wireless USA had a stronger position on the tax immunity of the USAC. Former FCC Commissioners Robert McDowell and Mignon Clyburn were among those who filed amicus curiae briefs favoring tax immunity for the USAC. The effect of such immunity is that it better enables Lifeline to serve its programmatic purpose of providing telecommunications services to qualifying low-income individuals. 

 

Universal service reform and the Lifeline program were topics for discussion during the hot topics in communications law and policy panel at the Free State Foundation's 16th Annual Policy Conference held on March 12.

 

 

Video of that panel and former FCC Commissioner Mignon Clyburn in discussion with former Commissioner Mike O’Rielly and two current Commission members can be found on FSF's video web page. 

State Court Weighing USAC on Tax Immunity for Lifeline

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.

Indeed, the central question to be addressed by the Washington Supreme Court in Assurance Wireless USA is whether the USAC is a federal instrumentality that is exempt from state taxation. Owing to the peculiar composition and function of the USAC in administering the Lifeline program on sub-delegated authority from the FCC, the parties' briefings offer sharply contrasting views on the matter.

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. 

Preemption Bill on Government-Owned Networks Rests on Shaky Legal Ground

On April 19, Sen. Cory Booker introduced in the U.S. Senate a bill called the Community Broadband Act of 2023 – S.1197. A House version of the Act – H.R. 2552 – previously was introduced in the 118th Congress, and was on the agenda for an April 19 hearing held by the House Communications & Technology Subcommittee. The legislation, if passed by Congress, would amend Section 706 of the Telecommunications Act of 1996 to prohibit state laws, regulations or other legal requirements that would prohibit state or local governments from entering into the broadband Internet access services market as a competitor against private market providers. 

A serious objection to government-owned broadband networks is the danger of local governments using their powers to favor their own networks above competing private market providers, including through permitting processes and setting fees. The Community Broadband Act appears to perceive this objection, but includes a provision that prohibits a local government from applying its laws and rules in a way that discriminates in favor of itself or of any provider that it owns. 

However, even if that provision alleviates that serious objection to government-owned broadband networks, there is another serious objection, based on the U.S. Constitution. While it almost certainly is permissible for Congress to forbid state and local governments from discriminating in favor of government-owned networks and against private networks, the Community Broadband Act isn't merely a bill that would regulate interstate commerce. Indeed, the bill necessarily would impermissibly regulate states as states. Decisions about whether or not to enter the broadband market as a provider as well as decisions about where and under what conditions to provide service necessarily are decisions about state governance, and structural federalism principles forbid Congress from interfering with those decisions. 

A February 2014 Perspectives from FSF Scholars, "FCC Preemption of State Bans on Municipal Broadband Networks is Most Likely Unlawful," and the Free State Foundation's August 2014 public comments filed with the FCC in its government-owned networks preemption proceeding make the case for why federal agency preemption of state law limits on government-owned network operations fails as a matter of constitutional law. Ultimately, the U.S. Court of Appeals for the Sixth Circuit vacated the Commission's preemption order in Tennessee v. FCC (2016). The same constitutional principles underlying that decision's interpretation of Section 706 also prohibit Congress from expressly preempting state law limits on whether, where, and under what conditions their local governments may enter into the broadband Internet access services business. 

Aside from government favoritism and structural constitutional issues, there are other serious policy objections to government-owned networks. But here it is enough to say that constitutional problems with federal preemption of state laws limiting market entry by government-owned broadband networks cannot be cured by non-discrimination provisions. Congress should not pass the Community Broadband Act of 2023. 

Supreme Court Hears Arguments in State Copyright Infringements Case

On November 5, the U.S. Supreme Court heard oral arguments in the copyright case of Allen v. Cooper. At issue in the case is whether state are sovereignly immune from copyright infringement claims or whether states' immunity was abrogated by the Copyright Remedy Clarification Act of 1990 (CRCA). According to a recap of the oral arguments posted at SCOTUSblog, some of the Justices pushed back against the idea that states could become copyright owners and yet also infringe others' copyrights with impunity. Among the observations reportedly made by the Justices during oral arguments was the idea that state infringements of copyrights is contrary to the Constitution's purpose in empowering Congress to secure exclusive rights in creative works to authors. Those are sound observations, and hopefully the Justices will follow through with a just decision that recognizes the legal rights of copyright owners against infringements by states, state institutions, and state officials. The Supreme Court will reach a decision in Allen by the end of the current term in June 2020.

Allen v. Cooper is the subject of my Perspectives from FSF Scholars paper published on October 16, "States Have No Right to Infringe Copyrights." That paper provides an overview of the case and takes a closer look at the nature of copyrights through the lens of the 14th Amendment's Privileges or Immunities Clause. Additionally, the Federalist Society produced an insightful podcast discussing Allen and the underlying issues involved. Also, Law Professor Adam Mossoff published an excellent op-ed on the case in the Wall Street Journal that is available online.

Flashback: Prof. Daniel Lyons on Mozilla v. FCC and Preemption of State Net Neutrality Regulation

On October 1, the U.S. Court of Appeals for the D.C. Circuit issued its decision in Mozilla v. FCC, upholding most of the FCC's Restoring Internet Freedom Order. Importantly, the D.C. Circuit upheld the FCC's decision to reclassify broadband Internet access services as "information services" under Title I of the Communications Act. (For Free State Foundation President Randolph May's reaction to the decision, see yesterday's blog post.)

Significantly, the D.C. Circuit's per curiam opinion vacated the express Preemption Directive contained in paragraphs 194-204 of the Restoring Internet Freedom Order. As is well known, states such as California have passed laws seeking to impose net neutrality regulation (and more), and governors in states such as Montana also have attempted to impose broadband network management restrictions through the use of their states' proprietary powers. So there will be much more to say about the Restoring Internet Freedom Order, state-level broadband services regulation, and preemption in the days ahead. That said, the preemption ruling in in Mozilla v. FCC was essentially anticipated by Professor Daniel Lyons in a February 2019 Perspectives from FSF Scholars. Prof. Lyons is a member of FSF's Board of Academic Advisors. For a perceptive analysis of express preemption and conflict preemption, as well as an advance outlook of what will likely follow the now-released decision by the D.C. Circuit, check out Prof. Lyons' paper, "Express and Conflict Preemption of State Net Neutrality Efforts."

Constitution Day 2019

Today, September 17, is Constitution Day, commemorating the signing of the proposed U.S. Constitution at the conclusion of the Philadelphia Convention in 1787. 

The work of the Free State Foundation, being dedicated constitutional principles and the rule of law, often addresses the intersection of current communications and intellectual property policy issues with constitutional structural and individual rights issues. Here are some publications by FSF scholars from 2018 and 2019 touching on constitutional matters: 

• FSF Comments regarding Commercial Leased Access Rates (July 22, 2019) (explaining why cable leased access rules are contrary to the First Amendment's Free Speech Clause jurisprudence);

• Prof. Daniel A. Lyons, "State Net Neutrality Mandates and the Dormant Commerce Clause: Some Preliminary Thoughts,"Perspectives from FSF Scholars, Vol. 14, No. 14 (May 21, 2019);

• Randolph J. May and Seth L. Cooper, "The FCC Should Stop Potential Liability for Smartphone Owners: The Ninth Circuit's Autodialer Decision Threatens Text Messaging Services," Perspectives from FSF Scholars, Vol. 14, No. 5 (Feb. 15, 2019) (explaining how a broad definition of "autodialer" bans protected free speech, contrary to the overbreadth doctrine in First Amendment jurisprudence);

• Randolph J. May and Seth L. Cooper, "John Marshall's Jurisprudence Supports Preemption of California's Net Neutrality Law," Federalist Society Review, Vol. 20 (Jan. 28, 2019);

• Randolph J. May, Maintaining the Constitution's Separation of Powers," Perspectives from FSF Scholars, Vol. 13, No. 37 (Oct. 1, 2018) [originally published in the Washington Times];

• Randolph J. May and Seth L. Cooper, "A Constitution Day Call to Strengthen Copyrights," Perspectives from FSF Scholars, Vol. 13, No. 35 (Sept. 17, 2018) [originally published in Real Clear Markets]; 

• Christopher J. Walker, "Judge Brett Kavanaugh's Views on Chevron Deference at the FCC and Beyond," Perspectives from FSF Scholars, Vol. 13, No. 32 (Aug. 28, 2018); 

• Seth L. Cooper, "FCC Proposals Promoting Infrastructure Deployment Don't Violate Anti-Commandeering Rule,"Perspectives from FSF Scholars, Vol. 13, No. 29 (Jul. 17, 2018); 

• Randolph J. May, "Woodrow Wilson's Case Against the Constitution," Perspectives from FSF Scholars, Vol. 13, No. 20 (May 31, 2018) [originally published in the Washington Times].

Not to be forgotten is the ongoing series on Constitutionalizing the Administrative State by Professor Joseph Postell, a Member of FSF's Board of Academic Advisors, which was the subject of yesterday's blog post.

Happy Constitution Day.  

Commissioner's Staffer Makes Persuasive Case Against Muni Broadband Preemption

Matthew Berry’s August 20 remarks to the National Conference of State Legislators hit all the high points about the problems posed by the FCC attempting to preempt state restrictions on muni broadband networks.

Berry serves as Chief of Staff to FCC Commissioner Ajit Pai. In his remarks, Berry succinctly explained to the state legislators gathered at NCSL’s 2014 Legislative Summit why FCC lacks the power under Section 706 of the Communications Act to preempt state laws restricting or banning their local governments from going into the broadband Internet business. 

Stated Berry:

[T]he text of Section 706 doesn’t even mention preemption, let alone preemption of state laws that regulate municipalities. Instead, Section 706 embraces other means, like “price cap regulation” and “regulatory forbearance,” to accomplish its goals. And when it comes to the objectives set forth in Section 706(b)—removing barriers to infrastructure investment and promoting competition in the telecommunications market—the Tenth Circuit recently concluded that the provision gave the FCC authority to provide universal service support for broadband networks. In sum, Section 706 does not condone preemption of state laws either explicitly or implicitly, and so it hardly offers up the clear statement one would expect if Congress intended the FCC to “interpos[e] federal authority between a State and its municipal subdivisions.”

Berry also touched on the structural federalism principles that stand behind this legal conclusion about the limits of federal preemption of states’ control over their local governments:

Sovereignty does not rest with American cities, towns, or counties. Rather, the Supreme Court has stated that local subdivisions merely “are created as convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them in their absolute discretion.” In short, under our constitutional framework, states are free to grant or take away powers from municipalities as they see fit. So the basic concept is this: City governments are appendages of state government, but state governments most definitely are not appendages of the national government.

As Berry observes, NCSL has gone on record opposing preemption by the FCC. NCLS even stated it will pursue legal action against the FCC should it pursue preemption of state restrictions on muni broadband networks. Likewise, the American Legislative Exchange Council (ALEC), has voiced strong opposition to FCC preemption on policy, statutory, and constitutional grounds.

Free State Foundation scholars have been on top of this issue since Chairman Wheeler first announced his intention to preempt states that restrict muni broadband networks. I first set out the principal legal and constitutional defects in the Chairman’s proposal in my Perspectives from FSF Scholars Essay, “FCC Preemption of State Bans on Municipal Broadband Networks is Most Likely Unlawful.” More recently, FSF President Randolph May has written in The Hill why “The FCC Shouldn’t Go Down the Primrose (Preemption) Path.” Expect further analysis from FSF Scholars on Chairman Wheeler’s problematic preemption plans in the time ahead.

The Prolific Professor Lyons on Broadband Policy

Not to be missed is the succinct case for tiered pricing made by Prof. Daniel Lyons in his March 25 post at The Hill's Congress blog, "Internet pricing: The next policy frontier." In addition to his academic duties at Boston College Law School, Prof. Lyons is a Member of FSF's Board of Academic Advisers.

As Prof. Lyons explains in the post: "Usage-based pricing is not inherently anti-competitive or anti-consumer. Rather, it is an alternative method of spreading costs across a network's customer base." As a result, heavy users pay more. "Tiered plans can also help make broadband more affordable to low-income consumers." Tiered or usage-based pricing practices are common throughout the economy.

On April 3, FSF published Prof. Lyons's Perspectives paper, "The Challenge of VoIP to Legacy Federal and State Regulatory Regimes." He also spoke at FSF's Fifth Annual Conference on panel focused on "The Right Regulatory Approaches for Wireline and Wireless Broadband Providers." The YouTube video for that panel is below.

Overburdening Wireless With by Overlapping Taxes

A study released in January by scholars at the Mercatus Center focuses on the high levels of taxation that wireless services and wireless consumers are faced with today. We've blogged about this unfortunate situation in prior posts.

In their study, "Wireless Taxes and Fees: A Tragedy of the Anticommons," Matthew Mitchell and Thomas Stratmann point out that combined federal, state and local taxes on wireless are about twice as high as the average retail sales tax. As the title suggests, the authors persuasively contend that wireless tax policy suffers from a "tragedy of the anticommons." That is, too many governments have the ability to tax wireless services, creating high levels of taxation for services for which consumers show a high degree of price sensitivity. In the authors' words:

When numerous interests are allowed to tax a single base, each does so without regard to the effect of its tax on the others. The problem can lead to over-taxation of the resource and to underutilization of the good or service being taxed. The problem is exacerbated when numerous levels of government have access to the same tax base.

The study offers another reminder about the need for tax reforms at the federal and state levels. For instance, FCC reforms of USF contributions are necessary to reduce the surcharge (that is effectively a tax) imposed on wireless consumers' monthly bills. Meanwhile, states need to better coordinate and streamline the multiple taxes assessed by tax jurisdictions within their borders and to bring overall tax rates on wireless services into line with general sales tax rates. States also need to ensure that so-called fees imposed on wireless services are not imposed for extraneous governmental purposes.