Wash. Justices Push Back on State Taxing Federal Lifeline

Washington state’s argument for taxing federal Lifeline support depends on the Washington Supreme Court agreeing that the Universal Service Administrative Co. is not the U.S. government’s instrumentality, agreed Deputy Solicitor General Cynthia Alexander, representing the state revenue department, at oral argument Thursday. State justices zeroed in on this question -- and practical impacts -- as they weighed whether federal Lifeline funds subsidizing low-income consumers’ phone lines are subject to the state’s retail sales tax.

T-Mobile subsidiary Assurance Wireless seeks review of a lower court ruling rejecting its argument that the carrier’s Lifeline services didn’t involve a retail sale. In an amicus brief last month, former FCC Commissioners Robert McDowell and Mignon Clyburn urged the Washington Supreme Court to reverse, saying states taxing Lifeline would cause great harm (see 2309120036).

No sales tax should apply because the wireless service is free, said Assurance counsel Eric Tresh of Eversheds Sutherland. If the state could tax the transaction in which Assurance receives reimbursement for providing the free service, then the FCC -- not its instrumentality USAC -- would be the buyer responsible for paying the tax, said Tresh. But the law protects the federal government from paying state taxes.

The FCC decides how much money to put in the USF and who gets disbursements, not the fund administrator, said Tresh. The arrangement is different from a typical government contract, where a vendor like Northrop Grumman would negotiate contracts and directly pay third parties, said Tresh. It’s telling, he said, that if Assurance were aggrieved by USAC, it would have to seek relief through the FCC administrative process, and only the FCC could be named in any lawsuit.

The 6th U.S. Circuit Court of Appeals saw USAC as subordinate to the FCC in a decision this year in Consumers Research v. FCC, added Tresh. “What the department is effectively arguing in this case is that a subordinate actor performing a ministerial task is somehow taking on a legal obligation to pay for a service that is admittedly free. That’s just not the state of the law.”

Justice Barbara Madsen asked Washington’s lawyer if she disagreed that USAC is a U.S. instrumentality that wouldn’t have to pay state tax. Alexander said USAC can’t be viewed as an instrumentality under a standard set in a 1982 U.S. Supreme Court decision, U.S. v. New Mexico. The government doesn’t run privately owned USAC’s day-to-day operations, nor does it have any ownership interest in the administrator, she said. “It’s a wholly owned subsidiary of a trade organization.”

Even USAC describes itself as an independent nonprofit that isn’t a government agency or a government-controlled corporation, the attorney said. Plus, a memorandum of understanding between USAC and the FCC states that the administrator “conducts its own procurements" and isn't the FCC's purchasing agent, she said. “The FCC could have but didn’t keep these tasks for itself.” Alexander also disagreed that USAC can’t be sued by aggrieved carriers.

Madsen asked if one possible distinction is that government contractors could pick up work from other sources, whereas USAC is designed for one function. USAC may manage only USF, but there are other contractors that do only government contracting, said Alexander. Madsen asked, “Is that by choice or by design?” The justice said she’s “trying to understand … if there is a difference between a contractor who maybe elects to only work for government contracts versus an entity … that is created and designed only to do that and really couldn't do anything else.”

Justice Debra Stephens asked about the "practical impact" of 50 states separately deciding whether Lifeline is subject to taxation. The tax wouldn’t fall on Lifeline beneficiaries, said Alexander. Stephens said, “So you’d have carriers in states that don’t tax this transaction helping to offset the impact on carriers in states that do.” The state lawyer agreed.

Justice Mary Yu pushed back on Alexander saying there’s no evidence that having to collect the tax would discourage carriers like Assurance from participating in Lifeline. “Isn’t that … sort of self-evident?” asked Yu. “I mean, how could it not have any impact? You might not have anything in the record here that says so, but doesn’t common sense and logic say that?”

Congress can step in if there are problems, said Alexander. Currently there’s no state sales tax exemption for Lifeline in Washington or U.S. law, she said. Federal legislators may choose to immunize the program from state taxes or they “could determine that the sovereignty of the states is more important,” said the counsel. “Those are the kind of political decisions that are best left to Congress.”