Wash. Supreme Court Rules State Can't Tax USAC Lifeline Reimbursements
It’s unconstitutional for Washington state to tax federal Lifeline reimbursements, the Washington Supreme Court unanimously decided Thursday. Siding with T-Mobile subsidiary Assurance Wireless, the state’s high court reversed a lower court’s opinion because it found that the Universal Service Administrative Co. (USAC) is the FCC’s instrumentality and thus immune from state taxes.
"While we agree that the transactions at issue in this case were retail sales and that the legal incidence of this tax falls on USAC, the buyer, we conclude that USAC operates as an instrumentality of the federal government [and] the retail sales tax therefore violates the intergovernmental tax immunity doctrine as applied in this case,” Justice Debra Stephens wrote in Thursday's decision (case 1018738). The Washington Supreme Court’s eight other justices concurred. T-Mobile declined to comment. Washington state didn’t comment.
"This is a smashing victory for the future of the Lifeline program which serves millions of the most vulnerable Americans,” said Robert McDowell of the Cooley law firm. Ex-Commissioners McDowell and Mignon Clyburn filed an amicus brief in the case. “Had Assurance not won here, it would have put the viability of the Lifeline program at risk,” McDowell said. “In essence, it would have allowed the states to preempt federal authority over this important program and, ultimately, destroy it."
Whether USAC is an instrumentality was a “close question,” wrote Stephens. The state argued that USAC is more like a private contractor than an instrumentality, and justices zeroed in on the question at oral argument last October (see 2310260063).
USAC "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," found the Washington Supreme Court. “Congress has acknowledged the FCC’s reliance on USAC and approved of their relationship as the means of implementing universal service programs.” And while “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,” the court said. The U.S. Supreme Court previously held the American Red Cross to be an instrumentality, added Stephens: USAC "is far more financially reliant on the federal government than even the Red Cross."
However, the state Supreme Court disagreed with Assurance that Lifeline reimbursements aren’t retail sales. "When Assurance provides a prepaid plan to each consumer, it accrues a legal interest in the Lifeline support funds,” reasoned the court. “This is the valuable consideration it receives for its services, and the fact that it realizes cash revenue only at a later date does not sever the sale into two separate transactions." The court also disagreed with Assurance that the FCC is the buyer who would be taxed by the state. “USAC is the party responsible for paying Lifeline carriers for their services,” wrote Stephens. “Carriers must submit their Lifeline Worksheets to USAC, not the FCC, and USAC is obligated to disburse the funds. Assurance received its reimbursements directly from USAC."