State Lifeline Taxation Would Cause 'Enormous' Harm, Say McDowell, Clyburn

The harm caused by imposition of state taxation on the federal Lifeline program “would be enormous,” said former FCC Commissioners Robert McDowell and Mignon Clyburn in an amicus brief Monday (docket 101873-8) in Washington Supreme Court in support of appellant Assurance Wireless. Assurance petitioned for review of a lower court ruling rejecting its argument that the carrier’s Lifeline services didn’t involve a retail sale.

Prior court decisions’ “mischaracterization” of Universal Service Administrative Co. (USAC) and its role “would open the way for taxation that was not contemplated by the FCC or Congress" when the Universal Service Fund (USF) was created, the brief said. USAC’s role is “exclusively administrative and ‘relatively narrow,’ it said, and its budget comes from the USF. Congress set up the USF system to enable all Americans to be able to access the communications services they need “to fully participate in society,” said the brief, citing a 2022 amicus brief of members of Congress in Consumers’ Research v. FCC.

Assurance said in an April petition the state's retail sales tax for telecom services isn't possible for its Lifeline service because that service is free to eligible consumers, and the carrier "cannot be held secondarily liable for failing to collect sales tax from an unidentified buyer."

Assurance claims the Washington Court of Appeals decision put Lifeline carriers "in the untenable position of being required to collect without knowing from whom to collect the tax" because the court identified Lifeline recipients or the USAC as a buyer. "Deeming USAC the buyer of a taxable service effectively and unconstitutionally imposes tax on the FCC," the carrier said.

At issue, said the former commissioners in their Monday motion for leave to file the amici brief, is whether the USAC can be liable for sales taxes without violation of the Constitution’s Supremacy Clause. The imposition of state taxes on USAC “presents a substantial threat to its viability,” said the brief. Lifeline has provided “critical free phone services to low-income individuals” for many years.

State taxes can’t be collected from the FCC or USAC, which is prohibited from paying sales taxes, said the former commissioners. USAC would need to seek FCC approval to pay any taxes, and if the FCC were to pay Washington state sales tax out of the USF, “that would directly decrease the amount of funds available to pay for universal service,” it said. Imposition of sales tax on USAC would be directly taxing the federal government’s Lifeline program and the FCC, making it “constitutionally infirm.”

The former commissioners urged the court to overrule the appeals court's decision “and preserve the federal universal service programs.” Citing the cases’ “significant ramifications,” the court should seek the FCC’s views on whether USAC can be liable for sales tax before making a decision, said the brief. “Any liability on USAC falls on the FCC," they said.