Washington State Court of Appeals is licensed under Public Domain

Americans for Tax Reform filed an amicus brief urging Washington State’s Court of Appeals (Division 1) to reverse a previous Board of Tax Appeals ruling. Instead, the Court should hold that federal funds from the Universal Service Fund (USF) to the Universal Service Administrative Company (USAC) cannot be assessed a sales tax by the state.  

The Universal Service Fund is a program that pays for advanced telecommunications and broadband services for underserved institutions, remote areas, and the poor. Congress delegated the task of running the USF to the Federal Communications Commission (FCC), and the agency in turn sub-delegated day-to-day operations, including disbursements, to USAC. Washington’s BTA incorrectly charged a sales tax to USAC and is demanding that either USAC or companies enrolled in the lifeline program pay sales taxes on the federal funds.

As expressly established by the agreement between USAC and the FCC, USAC is merely the “agent” of the FCC for distributing “support payments from the [USF],” which includes the federal funds distributed for the Lifeline support payments at issue in this case.  USAC must obtain FCC approval for USAC’s distribution of these funds. Because the FCC is immune from state sales taxes, USAC has no authority from the FCC to use these federal funds to pay state sales taxes. 

BTA’s mistake hinges on it’s belief that USAC is a contractor and states can tax contractors, However, USAC is not a contractor but an agent of the FCC. USAC does not buy “Lifeline” from the FCC and then resell it. USAC is fully governed by the FCC and therefore acts as its agent to disburse Lifeline funds to participating carriers. USAC therefore cannot be taxed as a buyer.  

Neither the FCC nor USAC can or would pay tax on federal funds. Should Washington hold their current position that USAC or carriers receiving Lifeline disbursements owe sales tax, carriers, in this case Assurance, who choose to participate in the Lifeline program and thus are able to offer their Lifeline qualifying customers service for free, would have to produce millions in back sales taxes and then charge Lifeline customers a sales tax on the price of zero going forward. 

Washington’s position is clearly incorrect. State taxes cannot be charged in federal dollars. Furthermore, no state has charged nor has any carrier paid sales tax on Lifeline services since the inception of the program. 

Katie McAuliffe, Director of Federal Policy at Americans for Tax Reform said: “Lifeline is a federally funded program that allows low-income individuals to receive, in many cases, free phone service. States cannot apply a sales tax to federal dollars, nor should they attempt to tax a zero-dollar transaction. This action is wholey inconsistent with the goals and intent of the program.

You can read the Amicus brief here