Assurance Wireless USA, LP v. Dep't of Revenue

544 P.3d 471

• Court: Washington Supreme Court
• Decided: March 7, 2024
• Docket: 101,873-8
• Status: Published

Opinion

FILE THIS OPINION WAS FILED IN CLERK’S OFFICE FOR RECORD AT 8 A.M. ON SUPREME COURT, STATE OF WASHINGTON MARCH 7, 2024 MARCH 7, 2024 ERIN L. LENNON SUPREME COURT CLERK

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

ASSURANCE WIRELESS USA, LP, f/k/a VIRGIN MOBILE USA, LP, NO. 101873-8

Petitioner, EN BANC

v.

STATE OF WASHINGTON Filed: March 7, 2024 DEPARTMENT OF REVENUE,

Respondent.

STEPHENS, J.—This case concerns the federal “Lifeline” program, which

subsidizes wireless services for low-income consumers. We must decide whether

the funds received by participating telecommunications carriers are subject to

Washington’s retail sales tax.

Assurance Wireless USA LP is a telecommunications company and provider

of Lifeline services in Washington State. It provides free mobile devices and

wireless services to Lifeline-eligible consumers and receives a $9.25 reimbursement

for each Lifeline consumer served. The Department of Revenue (Department)

audited Assurance and assessed retail sales tax, business and occupation (B&O) tax,

and interest on the reimbursements Assurance received between 2010 and 2016. Assurance challenged the assessments before the Board of Tax Appeals (BTA),

arguing that the transactions were not retail sales and thus should not be taxed at the

retail sales tax rate, and that even if they were, the Department was effectively taxing

the federal government in violation of the intergovernmental tax immunity doctrine.

The BTA upheld the retail tax assessments, finding that the transactions

constituted retail sales, that the “buyer” from whom Assurance should have been

collecting the tax was the Universal Service Administrative Company (USAC)—the

nonprofit the Federal Communications Commission (FCC) appointed to administer

Lifeline—and that because any tax burden on the federal government was indirect,

the assessments were constitutional. The BTA also rejected Assurance’s argument

that USAC should itself be considered a tax-immune instrumentality of the federal

government. Assurance sought judicial review, and the Court of Appeals, Division

One, affirmed.

We granted discretionary review and now reverse. 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, the retail sales tax therefore violates the

intergovernmental tax immunity doctrine as applied in this case. We reverse the

Court of Appeals and remand to the BTA for further proceedings consistent with this

opinion.

2 BACKGROUND AND PROCEDURAL HISTORY

History of the Lifeline Program and the Creation of USAC

The Communications Act of 1934 gives the FCC responsibility for “mak[ing]

available, so far as possible . . . a rapid, efficient, Nation-wide, and world-wide wire

and radio communication service with adequate facilities at reasonable charges.” 47

U.S.C. § 151. Recognizing the crucial role that telephone service plays in modern

society, the FCC created the Lifeline program in 1985 to provide telephone services

to vulnerable populations at a subsidized rate. See MTS and WATS Market

Structure; and Establishment of a Joint Board; Amendment, 50 Fed. Reg. 939, 941

(Jan. 8, 1985). Congress later codified this program as part of the

Telecommunications Act of 1996, 47 U.S.C. § 254. See, e.g., Mozilla Corp. v. Fed.

Commc’ns Comm’n, 444 U.S. App. D.C. 24, 940 F.3d 1, 68 (2019) (per curiam)

(discussing the history of the Lifeline program, citing 47 U.S.C. §§ 214, 254).

The FCC oversees four universal service programs, including Lifeline, but it

does not administer them directly. In May 1997, the FCC appointed the National

Exchange Carrier Association (NECA) as temporary administrator of the universal

service support mechanisms. Federal-State Joint Board on Universal Service, CC

Docket No. 96-45, FCC 97-157, 12 FCC Rcd. 8776, 8798 (May 8, 1997). In

response to concerns about NECA’s ability to fairly represent all market interests,

the FCC made its appointment contingent on NECA forming an independent not-

3 for-profit entity to administer the programs on its behalf. Changes to the Board of

Directors of National Exchange Carrier Association, CC Docket No. 97-21, FCC

97-253, 12 FCC Rcd. 18400, 18401-02 (July 18, 1997) (Changes to Board I),

https://docs.fcc.gov/public/attachments/FCC-97-253A1.pdf

[https://perma.cc/F4E9-U2AE]. This entity, USAC, was initially responsible for

administering two of the universal service programs: Lifeline and the high-cost area

support mechanism. Id. at 18415. In 1998, the FCC directed the consolidation of

administrative responsibilities for all universal service programs under USAC and

named it permanent administrator. Changes to the Board of Directors of the National

Exchange Carrier Association 13 FCC Rcd. 25058, 25059-60 (Nov. 20, 1998)

(Changes to Board II);

https://digital.library.unt.edu/ark:/67531/metadc2340/m1/166/

[https://perma.cc/SBS3-RLVS]; see also 47 C.F.R. § 54.701(a).

The Universal Service Fund (USF) receives mandatory contributions from

interstate telecommunications service providers. 47 C.F.R. § 54.706. The

contribution amount is based on the contributors’ projected revenues and a

contribution factor set by the FCC on a quarterly basis. 47 C.F.R. § 54.709. To

receive the basic support amount—currently set at $9.25 per eligible consumer—a

Lifeline carrier must submit FCC form 497 (the “Lifeline Worksheet”) to USAC and

certify that it will pass through the full amount of support to the consumer, either as

4 a reduction in the consumer’s bill or by offering a prepaid plan. 47 C.F.R. §

54.403(a)(1); see also Lifeline Worksheet (Apr. 2012 ed.) (carriers seeking

reimbursement are required to certify that their company “will pass through the full

amount of all Non-Tribal and Tribal federal Lifeline support for which it seeks

reimbursement, . . . to all qualifying low-income subscribers by an equivalent

reduction in the subscriber’s monthly bill for voice telephony service, or by offering

a pre-paid wireless plan that includes a set number of minutes of use per month”)

https://www.usac.org/wp-content/uploads/lifeline/documents/forms/FCC-Form-

497-EDITABLE-2012.pdf [https://perma.cc/CPF2-Z7AX]. USAC provides this

support directly to the carrier based on the number of qualifying low-income

customers the carrier is serving as of the first of each month. 47 C.F.R. § 54.407(a).

Where the carrier opts to provide a prepaid plan, it may receive USF funds only after

the subscriber has activated their service and only for so long as the subscriber makes

qualifying use of the service within each subsequent 30-day period. See 47 C.F.R.

§ 54.407(c)(2).

Procedural History

Assurance is a telecommunications carrier and a provider of Lifeline services

in Washington State. Assurance opted to provide its Lifeline services in the form of

free prepaid plans. These plans include a free wireless phone and a fixed amount of

voice minutes, text messages, and data. If consumers exceed their free allocation of 5 services, they may purchase additional services at a fixed rate. The reimbursement

rate for the prepaid plans was $9.79 per subscriber prior to September 2012, and

$9.25 per subscriber from September 2012 to December 2016.

The Department audited Assurance’s excise records for the period of January

2010 to December 2011 and assessed $768,493 in taxes, including B&O tax, retail

sales tax, and interest. Assurance appealed the assessment, and while the appeal was

pending, the Department conducted an audit for the period of January 2012 to

December 2016, assessing an additional $3,986,316 in combined B&O tax, retail

sales tax, and interest. Assurance petitioned for review of the second assessment,

which was consolidated with the earlier appeal. The Department upheld the

assessments, and Assurance appealed to the BTA, seeking a refund of $3,895,840.

The Department moved for summary judgment dismissing Assurance’s

challenge, which the BTA granted. The BTA concluded that the Lifeline

disbursements were subject to the retail sales tax, that USAC was the buyer for tax

purposes, and that USAC was not a tax-immune instrumentality of the federal

government. Assurance sought judicial review in King County Superior Court, and

the appeal was transferred to the Court of Appeals, Division One. In a published

decision, the Court of Appeals affirmed that the Lifeline transactions qualified as

retail sales and that USAC was not a tax-immune instrumentality. Assur. Wireless

USA, LP v. Dep’t of Revenue, 25 Wn. App. 2d 237, 522 P.3d 65 (2022). However, 6 the Court of Appeals declined to specify whether the buyer was USAC or the

Lifeline consumers. Id. at 253.

ANALYSIS

To resolve this case, we must first determine whether a retail sale occurred at

all, and if so, whether there is a qualifying buyer from whom Assurance could

lawfully collect the retail sales tax. Our inquiry does not end there, however, as we

must decide whether collection of the tax is prohibited by federal statute or the inter-

governmental immunity doctrine. These are all questions of law, and our review is

therefore de novo. Steven Klein, Inc. v. Dep’t of Revenue, 183 Wn.2d 889, 895, 357

P.3d 59 (2015). As this opinion will explain, we find the Lifeline transactions were

retail sales because Assurance received valuable consideration for the services it

rendered. We further agree with the BTA that USAC—not the FCC—is the buyer

legally obligated to pay Assurance for these services and therefore bears the legal

incidence of the retail sales tax. However, after considering the special relationship

between USAC and the FCC, we hold it is an instrumentality of the federal

government and therefore immune from state taxation.

1. Assurance’s provision of prepaid wireless services in exchange for Lifeline support funds constitutes a retail sale

Assurance argues that its participation in the Lifeline program is not a retail

sale because it receives no valuable consideration for the services it provides. At

7 summary judgment, the BTA ruled that there was a retail sale, based on the exchange

of telecommunications services as consideration for the Lifeline support funds. The

Court of Appeals affirmed the BTA on this issue. Assur. Wireless, 25 Wn. App. 2d

at 247. We agree.

A person making retail sales in Washington is subject to two taxes: (1) a

retailing B&O tax, calculated as a percentage of gross proceeds of sales, and (2) a

sales tax, calculated as a percentage of the selling price of each sale. RCW 82.04.220

(B&O tax); RCW 82.08.020 (sales tax). A “sale” is the “transfer of the ownership

of, title to, or possession of property for a valuable consideration and includes any

activity classified as a ‘sale at retail’ or ‘retail sale’ under RCW 82.04.050.” RCW

82.04.040(1). This includes sales of “‘telecommunications service[s].’” RCW

82.04.050(5). “Valuable consideration” includes the exchange of “money, credits,

rights, or other property expressed in terms of money,” whether actually received or

accruing as a debt or claim upon the transfer of the property. RCW 82.04.090

(“‘Value proceeding or accruing’ means the consideration, whether money, credits,

rights, or other property expressed in terms of money, actually received or accrued.”

(emphasis added)).

Assurance’s argument is that its participation in the Lifeline program involves

two separate business activities, neither of which constitutes a retail sale. First,

Assurance gives away free prepaid phones and wireless services. At the time of this

8 transaction, Assurance says it receives no valuable consideration and thus no sale

has occurred. Later, Assurance receives disbursements for participating in the

Lifeline program after submitting the Lifeline Worksheet to USAC. Although the

amount it receives is based on the number of active Lifeline subscribers, Assurance

contends that the disbursements are not actually consideration for the

telecommunications services rendered. Instead, it says the money is for participating

in the Lifeline program and following FCC regulations. Assurance stresses language

in the Code of Federal Regulations that call the disbursements a “[r]eimbursement

for offering Lifeline” and that the amount of reimbursement is to be “based on the

number of actual qualifying low-income customers.” 47 C.F.R. § 54.407(a)

(emphasis added).

The BTA concluded there is a taxable retail sale involving three parties—the

consumer/Lifeline recipients, USAC, and Assurance—and that “[t]he consideration

[Assurance] receives from USAC for providing the Lifeline service is the

consideration for the telecommunication service that is subject to Washington’s tax.”

Clerk’s Papers (CP) at 59. The Court of Appeals affirmed, holding that

[i]nstead of there being two unrelated activities, the amount of Lifeline funding Assurance receives is directly tied to the number of Lifeline plans it provides. That Assurance may voluntarily reduce this number and that there is some time period between the time when Assurance provides Lifeline service and the time it receives funds from USAC do not, separately or together, attenuate the connection between these two ‘activities’ such that there is no retail sale as defined by Washington tax law. 9 Assur. Wireless, 25 Wn. App. 2d at 245.

Assurance argues the Court of Appeals wrongly concluded that

reimbursements are consideration merely because they “pertain to” a taxable service.

Put differently, not all transfers of property are retail sales—there must be a transfer

in exchange for consideration, and Assurance believes the Court of Appeals glossed

over this important distinction. While Assurance is correct that retail sales require a

transfer of property and corresponding transfer or accrual of valuable consideration,

Assurance does in fact receive valuable consideration when it provides the Lifeline

services. Although it does not record revenue until it has submitted a reimbursement

request, after the services have been provided, Assurance accrues a legal entitlement

to the Lifeline support funds. Indeed, it recognizes this claim to reimbursement

using accrual accounting, logging its expected reimbursements in an account

receivable until the refunds are received. Assurance accrues a legal claim to $9.25

per active subscriber as consideration for the services it provides, which is valuable

consideration within the meaning of the statute.

Assurance relies on two Washington cases to support its argument that the

service it provides to customers is separate from reimbursements received from

USAC. The first is Activate, Inc. v. Department of Revenue, 150 Wn. App. 807, 209

P.3d 524 (2009). There, Activate, a retail seller of cell phones and wireless plans,

purchased cell phones from AT&T suppliers and then offered them to consumers for 10 free, contingent on them signing up for an AT&T service plan. Id. at 810. For every

customer who signed up for a plan, Activate would receive a commission from

AT&T. Id. Activate did not pay sales tax on the cell phones it bought, claiming the

resale exemption, but when the Department learned that Activate had been giving

them away “‘without an additional or separate charge,’” it assessed retail sales tax

on the purchases. Id. at 810-11 (quoting court papers). Activate argued that it was

not really giving away the phones; instead, it was reselling them in exchange for the

consumers’ promise to buy an AT&T plan, which would result in Activate being

paid a commission. Id. at 818. The Court of Appeals rejected this argument, holding

“a customer’s promise to enter into a service agreement with a third party [does not]

meet[] the statutory definition of ‘valuable consideration’ under RCW

82.04.040(1).” Id. (emphasis omitted).

Assurance’s reliance on Activate is misplaced. Activate never had a legal

expectation of receiving compensation for the phones themselves but, instead,

reaped a reward for selling AT&T service plans. Id. That Activate used the phone-

giveaways to stimulate the sale of service plans did not convert the resulting

commissions into consideration for the phones. Id. But here, Assurance accrues a

legal claim to $9.25 for each qualifying low-income consumer that it provides

services to, and the payments are clearly for the services. 47 C.F.R. § 54.407

(reimbursement to carrier “based on the number of actual qualifying low-income

11 consumers” it serves). It is not, as Assurance maintains, an incentive for the more

abstract activity of participating in Lifeline, divorced from the value of actual taxable

services rendered. If the reimbursements were simply for offering Lifeline,

Assurance could expect reimbursements regardless of whether it actually served any

qualifying Lifeline consumers. Instead, Assurance must show that it has provided

Lifeline services, and it is entitled to reimbursement only commensurate with the

number of customers it has actually provided services to. Id. Thus, the

reimbursements are best viewed as consideration for Assurance’s prepaid plans.

Assurance next cites Klein, 183 Wn.2d 889. Klein is similar to Activate in

that it concerned a commission—referred to as “dealer cash”—paid by Honda to

dealerships if they sold certain models of cars within specified time frames. Id. at

891. We held that the receipt of dealer cash was not a retail sale because Klein

Honda (the dealer) was not selling cars to Honda. Id. at 898. Instead, the dealer

cash represented an “extra benefit” that the dealer received “in addition to the money

it would ordinarily make from retail sales without the dealer cash program.” Id. at

898-99. Klein is also unhelpful to Assurance. In Klein, the dealer cash did not apply

to the sale—the money was not in exchange for the car itself, but for the act of selling

the car. Id. at 901. Here, USAC is paying money to be applied to the sale of wireless

services to low-income consumers, making the payments part of the sale itself.

12 In sum, the Lifeline transactions at issue here qualify as retail sales. When

Assurance provides a prepaid plan to each consumer, it accrues a legal interest in the

Lifeline support funds. 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.

2. USAC bears the legal incidence of the retail sales tax because it is the “buyer” in the Lifeline transaction

The BTA concluded that USAC, not the FCC, was the buyer legally obligated

to pay for the Lifeline services. The Court of Appeals agreed with the BTA that the

FCC was not the buyer, but it declined to answer whether the actual buyer was

USAC or the Lifeline consumers. Assur. Wireless, 25 Wn. App. 2d at 249. The

Court of Appeals did not find it necessary to decide because, in its view, neither of

these potential buyers could claim tax immunity. Id. at 252-53. We disagree.

Applying the proper analysis under the intergovernmental tax immunity doctrine,

the USAC is a tax-immune instrumentality of the federal government. We must

therefore determine who the buyer is in the Lifeline transaction triangle.

The legal incidence of the retail sales tax falls on the buyer. RCW 82.08.050.

The buyer is the one who has the legal obligation to pay the seller, regardless of who

ultimately pays. Canteen Serv., Inc. v. State, 83 Wn.2d 761, 762, 522 P.2d 847

(1974) (“The legal incidence of a tax does not always fall upon the same person or

13 entity as the economic burden.” (citing Alabama v. King & Boozer, 314 U.S. 1, 62

S. Ct. 43, 86 L. Ed. 3 (1941); Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110, 74 S.

Ct. 403, 98 L. Ed. 546 (1954)). A leading case explaining the difference is Murray

v. State, 62 Wn.2d 619, 384 P.2d 337 (1963), where this court recognized that

mortgagor-builder corporations involved in military housing projects were the

relevant buyers for sales tax purposes because they were contractually obligated to

pay the contractors for constructing the housing, even though the funds came from

the federal government. Id. at 624-25. Sellers are obligated to collect sales tax, and

if the seller fails to collect the sales tax from the buyer, they will be held liable to the

State for the full amount of the tax. RCW 82.08.050(3). Until paid, the amount of

the tax is considered a debt from the buyer to the seller. RCW 82.08.050(8).

Lifeline consumers are not the buyers because they have no legal obligation

to pay for the prepaid plans. The parties agree on this point. If consumers wish to

“top-up” their accounts after exhausting their 250 monthly minute allocation, they

can do so by registering a payment method or by purchasing “Top-Up cards” at retail

locations. CP at 180. But these are separate transactions for which Assurance does

collect and remit sales tax. Unless the consumers choose to make such additional

purchases, Assurance has no legal expectation of payment from them.

Assurance maintains that if the Lifeline program involves a retail sale at all,

the FCC is the true buyer. In support of this assertion, Assurance makes three claims: 14 (1) Congress delegated the Lifeline program to the FCC, (2) Lifeline’s only source

of funding is federal funds that may be used only for purposes designated by

Congress, and (3) USAC is merely an administrator or instrumentality of the FCC.

In our view, none of these asserted facts, separately or combined, can satisfy

Assurance’s burden of demonstrating that the tax falls on the FCC. See Simpson Inv.

Co. v. Dep’t of Revenue, 141 Wn.2d 139, 149-50, 3 P.3d 741 (2000) (the taxpayer

has the burden of proving entitlement to a refund).

Delegating a program to a federal agency does not exempt from taxation the

funds paid to contractors in furtherance of that program, unless clearly indicated in

statute. For example, in Murray, the federal Capehart Act tasked the United States

Secretary of Defense with assessing the need for military housing and entering into

contracts for its construction. See Murray, 62 Wn.2d at 620-21. Congress expressly

delegated this program to the United States Department of Defense, but this did not

immunize the funds it paid to construction companies from taxation. Id. at 625.

Critically, the government chose to interpose a third party between itself and the

recipients of the funds. See id. at 626. The contractors established these “mortgagor-

builder” corporations for the sole purpose of facilitating their building contracts with

the federal government, and the federal government supplied them with funds. Id.

at 626-27. Nonetheless, this court held that because the contract named the

mortgagor-builders as the parties obligated to pay the contractors, the mortgagor-

15 builders bore the legal incidence of the tax. Id. at 629-30; see also F.D. Rich Co. v.

Dep’t of Revenue, 79 Wn.2d 296, 484 P.2d 1138 (1971) (reaching the same

conclusion on almost identical facts). Like in Murray and F.D. Rich Co., USAC

stands between the FCC and Assurance such that the legal incidence of the sale tax

cannot be said to fall directly on the FCC.

Other cases reinforce the reasoning in Murray. In King & Boozer, the Court

held that a tax on a federal contractor did not amount to a tax on the federal

government, even where the contract terms required the government to reimburse

the contractor for sales taxes paid on construction materials. 314 U.S. at 14; cf.

Kern-Limerick, Inc., 347 U.S. at 126 (Douglas, J., dissenting) (Navy purchasing

agents exempt from state sales tax because purchasing orders identified the

government as the actual purchaser and the entity solely liable for the purchase

price). The Court has upheld taxes imposed on cost-plus-fixed-fee contractors in

several other cases, including where the funds were drawn directly from federal

funds, as opposed to being reimbursed to the contractors. See United States v. Boyd,

378 U.S. 39, 84 S. Ct. 1518, 12 L. Ed. 2d 713 (1964); United States v. New Mexico,

455 U.S. 720, 102 S. Ct. 1373, 71 L. Ed. 2d 580 (1982); United States v. California,

507 U.S. 746, 113 S. Ct. 1784, 123 L. Ed. 2d 528 (1993). These cases involve

transactions similar to the Lifeline program, in that the economic burden falls on a

federal program or agency, but not the legal incidence.

16 Assurance also claims that the Lifeline disbursements are federal funds over

which USAC exerts a purely ministerial role. In Assurance’s view, because USAC

is a mere conduit for the funds, the Department is taxing the federal funds directly,

and therefore taxing the federal government. This argument has some appeal, but

there are two problems with it. First, it is not clear that the USF contributions can

be considered “federal funds” in the sense Assurance implies. 1 We think this point

is debatable. But even if the Lifeline disbursements are classified as federal funds,

this would not be dispositive as to whether the federal government bears the legal

1 See, e.g., In re Incomnet, Inc., 463 F.3d 1064, 1066 (9th Cir. 2006) (“The USF contributions are not defined as federal funds; however, they exist because of a federal mandate.” (citing In re LAN Tamers, Inc., 329 F.3d 204, 206 (1st Cir. 2003))). Telecommunication carriers directly pay funds into the USF, and USAC distributes the funds to the Lifeline carriers. The FCC does not control the money except indirectly through regulation of USAC. Id. at 1071 (“While we recognize that the FCC does hold substantial power over the fund indirectly, essentially by overseeing USAC, we also recognize that it has no ability to control the USF through direct seizure or discretionary spending.”) This arrangement has created confusion over how to classify the funds. Compare United States ex rel. Shupe v. Cisco Sys., Inc., 759 F.3d 379 (5th Cir. 2014) (holding that although the FCC maintains a regulatory interest in the USF funds, it does not “provide” any of the funds, and thus disbursements were not subject to the False Claims Act), with United States ex rel. Heath v. Wis. Bell, Inc., 111 F. Supp. 3d 923 (E.D. Wis. 2015) (concluding that the government “provided” the money despite being held in a private fund and administered by a private company). See also Memorandum of Understanding between the Fed. Commc’ns Comm’n & the Universal Serv. Admin. Co. at 1 (Dec. 19, 2018) (“The monies of the USF are federal funds.”), https://www.fcc.gov/sites/default/files/usac-mou.pdf [https://perma.cc/3QNE-YECV]; (“The monies of the USF are federal funds”); ANGELE A. GILROY, CONG. RSCH. SERV., UNIVERSAL SERVICE FUND: BACKGROUND AND OPTIONS FOR REFORM 4 (June 30, 2011) (“The USF receives no federal monies . . . .”), https://sgp.fas.org/crs/misc/RL33979.pdf [https://perma.cc/Q2EB-SXF9].

17 incidence of the tax, only proof that it shoulders the economic burden. Murray, 62

Wn.2d at 620-21. Constitutional immunity applies solely in circumstances where

the tax falls directly on the federal government or its instrumentality. See California,

507 U.S. at 753; New Mexico, 455 U.S. at 735 (“immunity cannot be conferred

simply because the tax is paid with Government funds”). In California, the Court

upheld taxes imposed on federal contractors, even where the taxes were paid directly

out of a bank account controlled by the federal government. 507 U.S. at 753 (“[T]he

Government’s voluntary agreement to reimburse (or even fund in advance) [its

contractor] for [state] taxes does not make the Government’s payments direct

disbursements of federal funds to the State.”).

We conclude the BTA correctly identified USAC as the buyer in this retail

sale transaction. USAC is the party responsible for paying Lifeline carriers for their

services. 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. The fact that the FCC exerts substantial

control over USAC is insufficient under the Supreme Court’s precedent to show that

the tax falls directly on the federal government. That does not end our inquiry,

however, as we must further examine whether USAC is itself an entity immune from

taxation.

18 3. USAC is a tax-immune instrumentality of the federal government and therefore the retail sales tax is unconstitutional as applied

There are two situations in which the imposition of a state tax might be

prohibited by federal law: first, where Congress has expressly extended immunity

by statute (statutory preemption), and second, where the tax falls directly on the

federal government or its instrumentalities thereby offending the intergovernmental

immunity doctrine (constitutional preemption). The Supreme Court recognized

constitutional preemption in M‘Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.

Ed. 579 (1819), explaining that although the Constitution lacks any express

prohibition, allowing states to tax the instruments through which the federal

government exercises its powers and duties would be fundamentally inconsistent

with our constitutional structure. As a result, instrumentalities of the federal

government are immune from all forms of taxation absent an express Congressional

waiver of immunity. See Nat’l R.R. Passenger Corp. v. Pa. Pub. Util. Comm’n, 665

F. Supp 402, 409 (E.D. Pa. 1987) (collecting cases), aff’d, 848 F.2d 436 (3d Cir.

1988). Still, courts construe the universe of tax-immune instrumentalities narrowly.

See New Mexico, 455 U.S. at 735, 737.

If the entity being taxed is not a federal instrumentality, nondiscriminatory

taxes are valid absent an express statutory grant of tax immunity. Congress

sometimes expressly designates an entity as tax immune. See First Agric. Nat’l Bank

19 of Berkshire County v. State Tax Comm’n, 392 U.S. 339, 88 S. Ct. 2173, 20 L. Ed.

2d 1138 (1968). In First Agricultural National Bank, the Court held a state tax on

shares of a national bank to be unconstitutional because a federal statute expressly

preempted the tax. And because this was an independently sufficient basis to reverse,

the Court declined to reach the State’s broader attack on M‘Culloch’s relevance to

modern national banks and whether they should be viewed as categorically tax

immune. Congress can also immunize “contracts in a particular form, or contracts

under particular programs,” which would provide a more limited form of immunity

embracing only those activities of contractors that pertain to the government

programs. New Mexico, 455 U.S. at 737 (citing James v. Dravo Contracting Co.,

302 U.S. 134, 161, 58 S. Ct. 208, 82 L. Ed. 155 (1937); Carson v. Roane-Anderson

Co., 342 U.S. 232, 234, 72 S. Ct. 257, 96 L. Ed. 257 (1952)). In either case, tax-

immune status would be purely a matter of statute.

A. Taxation of Universal Service Funds Is Not Preempted by Any Statute

Assurance and amici point to two statutory provisos they claim exempt USF

funds from state taxation. Assurance cites 47 U.S.C. § 254(e) to support its claim

that using USF funding to pay state taxes is prohibited by federal law. The statute

says, in relevant part, “A carrier that receives such support shall use that support only

for the provision, maintenance, and upgrading of facilities and services for which

the support is intended.” 47 U.S.C. § 254(e) (emphasis added). But the relevant

20 statutes say nothing about taxes, nor does the cited language indicate an intent to

immunize the funds from taxes levied on otherwise eligible expenditures of USF

funds. This falls well short of the clear legislative expression required to establish

statutory tax immunity, and we do not read this language narrowing the permissible

uses of funding as implicitly exempting eligible expenditures from otherwise lawful

taxes.

Amici raise a statutory preemption argument based on a different proviso—

47 U.S.C. § 254(f). This portion of the statute allows states to adopt regulations to

advance universal service within their states, provided that these regulations are not

inconsistent with the FCC’s rules and that they adopt “additional specific,

predictable, and sufficient mechanisms to support such [programs] or standards that

do not rely on or burden Federal universal service support mechanisms.” 47 U.S.C.

§ 254(f). Amici cite to a recent case, Virgin Mobile USA, LP v. Keen, 447 F. Supp.

3d 1071, 1091 (D. Kan. 2020), where the court found Kansas’ regulations requiring

Lifeline carriers to contribute to the state’s universal service program based on their

Lifeline disbursements violated 47 U.S.C. § 254(f). But neither 47 U.S.C. § 254(f)

nor its application in Virgin Mobile USA support amici’s overly broad reading of its

preemptive effect.

We agree with the BTA that 47 U.S.C. § 254(f) is inapplicable to these facts.

In its decision, the BTA held that “Congress’s prohibition on state-enacted service 21 standards that conflict with federal standards does not apply to generally applicable

state taxes.” CP at 60. The preemptive effect of 47 U.S.C. § 254(f) is directed at

regulations the State might enact to establish or bolster their own universal service

programs, not to preempt any state regulation that might have the effect of burdening

the federal USF.

We conclude that Assurance is not statutorily exempt from retail sales tax and

therefore turn to the dispositive question of whether it is exempt based on

constitutional principles.

B. Taxation of USAC Is Preempted by the Supremacy Clause of the United States Constitution Because USAC Is an Instrumentality of the Federal Government

With no statutory exemption on point, the validity of the Department’s tax

assessment hinges on whether USAC is an instrumentality of the federal government

subject to intergovernmental tax immunity. Although it is a close question, we

reverse the Court of Appeals and the BTA and hold that USAC is a tax-immune

instrumentality.

As noted, the supremacy clause bars states from taxing the federal government

or the instruments employed by the federal government in the execution of its

powers. See M‘Culloch, 17 U.S. 316. In the century following the M‘Culloch

decision, the Supreme Court charted an expansive intergovernmental immunity

doctrine that shielded federal employees’ income, income derived from the lease of

22 federal land, and sales to the United States from any manner of state taxation. See

New Mexico, 455 U.S. at 731 (collecting cases). Then, in Dravo Contracting Co.,

the Court upheld a tax on a contractor’s revenues earned through contracts with the

federal government, noting:

“[I]t is not necessary to cripple [the state’s taxing power] by extending the constitutional exemption of taxation to those subjects which fall within the general application of non-discriminatory laws, and where no direct burden is laid upon the governmental instrumentality, and there is only a remote . . . influence upon the exercise of the functions of government.”

302 U.S. at 150 (quoting Willcuts v. Bunn, 282 U.S. 216, 225, 51 S. Ct. 125, 75 L.

Ed. 304 (1931)). Today, the supremacy clause prohibits only those taxes laid

directly on the federal government or on an entity “so closely connected to the

Government that the two cannot realistically be viewed as separate entities.” New

Mexico, 455 U.S. at 735.

There is “no simple test for ascertaining whether an institution is so closely

related to governmental activity as to become a tax-immune instrumentality.” Dep’t

of Emp’t v. United States, 385 U.S. 355, 358-59, 87 S. Ct. 464, 17 L. Ed. 2d 414

(1966). Factors courts have considered include whether the entity is organized for

profit and whether the government exercises such control that the entity could be

considered a “servant”; whether it was organized to effectuate a specific

governmental program; whether its ownership, substantially or totally, lies with the

23 federal government; whether government officials handle and control its operations;

whether its officers or any significant portion of them are appointed by the

government; whether the government gives significant financial aid; and whether it

is regarded “‘virtually as an arm of the [g]overnment.’” First Agric. Nat’l Bank, 392

U.S. at 353-54 (Marshall, J., dissenting) (quoting Dep’t of Emp’t, 385 U.S. at 359-

60).

The Department urges that USAC is more akin to a private contractor than to

a governmental instrumentality and that New Mexico, 455 U.S. 720, supplies the rule

of decision in cases such as this. In New Mexico, contractors for the United States

Department of Energy (DOE) challenged state taxes levied on the funds received

from the federal government as recompense for managing atomic research facilities

in New Mexico. In upholding the tax assessment, the Supreme Court acknowledged

the confusing nature of its precedents, particularly as to the proper role of traditional

agency notions in its analysis, and clarified that to establish constitutional tax

immunity, it is not enough to show a mere agency relationship between the taxpayer

and the federal government. New Mexico, 455 U.S. at 733. Rather, there must be

sufficient government control over the agent and such a congruence of professional

interests that the contractor could be considered a servant or employee of the federal

government. See id. Based on the facts before it, the Court held that private

corporations managing DOE facilities under cost-plus-fixed-fee contracts were not

24 tax immune because government officials did not oversee their day-to-day work, the

government had no ownership interest in them, they had an independent profit

motive, and their relationship with the government was created for limited and

carefully defined purposes. New Mexico, 455 U.S. at 740-41.

New Mexico and similar cases highlight the special importance of establishing

a congruence of professional interest between an entity claiming tax immunity and

the federal government. See Boyd, 378 U.S. at 45 (finding contractors liable for state

taxes in circumstances almost identical to those in New Mexico and noting, “‘The

vital thing’ is that [the contractors] ‘[are] using the property in connection with

[their] own commercial activities’” (quoting United States v. Township of Muskegon,

355 U.S. 484, 486, 78 S. Ct. 483, 2 L. Ed. 2d 436 (1958)); Muskegon, 355 U.S. at

486 (upholding a property use assessment against Continental Motors with the

caveat that the result might have been different had the government “reserved such

control over the activities and financial gain of Continental that it could properly be

called a ‘servant’ of the United States” (emphasis added)); Clallam County v. United

States, 263 U.S. 341, 345, 44 S. Ct. 121, 68 L. Ed. 328 (1923) (holding that a

corporation created by the government solely for the purposes of cutting spruce trees

to be used in its war effort was a tax-immune instrumentality and noting, “This is

not like the case of a corporation having its own purposes as well as those of the

United States and interested in profit on its own account”); see also Dep’t of Emp’t,

25 385 U.S. at 360 (the fact that government officials did not oversee the day-to-day

work of the Red Cross was not fatal to finding it was an instrumentality of the federal

government).

Assurance cautions that New Mexico and Boyd are inapposite here because

USAC is not a contractor. As Assurance notes, “[T]he FCC does not reimburse or

pay USAC for anything. USAC has no customers and its activities are limited to

duties delegated to it by the FCC.” Assur. Wireless USA, L.P.’s Supp’l. Br. at 3.

These claims are substantiated by the FCC’s regulations and further supported by

USAC’s own public representations. See 47 C.F.R. § 54.702 (defining USAC’s

functions and responsibilities); UNIVERSAL SERV. ADMIN. CO., FEDERAL UNIVERSAL

SERVICE PROGRAMS FUND SIZE PROJECTIONS & CONTRIBUTION BASE FOR THE

FOURTH QUARTER 1998 (July 31, 1998) (an early report to the FCC in which the

USAC represents itself as having been “created under Subpart H of the

Commission’s Part 54 rules for interim administration of [the USF programs] . . .

.”), https://www.usac.org/wp-content/uploads/about/documents/fcc-

filings/1998/fourth-quarter/financials/FCC-Filing-Fourth-Quarter-1998.pdf

[https://perma.cc/6NVW-U2N4]; UNIVERSAL SERV. ADMIN. CO., 2022 ANNUAL

REPORT (2022) (USAC’s annual reports are entirely concerned with its

administration of the universal service programs), https://www.usac.org/wp-

content/uploads/about/documents/annual-reports/2022/

26 USAC_2022_Annual_Report.pdf [https://perma.cc/D2JX-W6EE]. USAC has no

corporate purpose other than as defined by FCC regulations, nor does it have any

independent profit motive. See id. Although government officials do not manage

its day-to-day work, its operations are nonetheless narrowly prescribed by federal

regulations. See id.

Given the congruity of professional interests between USAC and the FCC—

found lacking in New Mexico and other cases involving mere contractors—we agree

with Assurance that New Mexico is distinguishable. USAC was created for the

express purpose of effecting the government’s telecommunications policy objectives

and the FCC played a significant role in its creation. 2 There was no bidding by

2 USAC was incorporated by NECA, an organization created pursuant to an FCC mandate though otherwise independent of the agency. See Changes to Board of Directors of National Exchange Carrier Association, CC Docket 97-21, FCC 97-11, 12 FCC Rcd. 72, 73 (Jan. 10, 1997). https://digital.library.unt.edu/ark:/67531/metadc2339/m1/83/ [https://perma.cc/7SNE-6VVV]. The FCC issued an order directing NECA to establish the USAC and two additional, unaffiliated nonprofits—the Schools and Libraries Corporation (SLC) and the Rural Health Care Corporation (RHCC)—as a precondition to naming NECA the temporary administrator of the USF. See Changes to Board I, 12 FCC Rcd. 18400. The SLC and the RHCC were subsequently folded into USAC after the United States Government Accountability Office (GAO) suggested the FCC had violated the Government Corporation Control Act by ordering their creation. See A. Michael Froomkin, Wrong Turn in Cyberspace: Using ICANN To Route around the APA and the Constitution, 50 DUKE L.J. 17, 79 (2000) (The General Counsel of the GAO raised concerns that the FCC’s general authority to create corporations had been abrogated by 31 U.S. § 9102. The GAO was unpersuaded by the FCC’s argument that NECA, not the FCC had created the SLC and the RHCC, saying the statute “‘prohibits an agency from creating or causing creation of a corporation to carry out government programs without explicit statutory authorization.’” (quoting Letter from Off. of Gen. Couns., Gen. Accounting Off., to the Hon. Ted Stevens, U.S. Senate at 5-6 (Feb. 10, 1998), https://www.gao.gov/assets/b-

27 NECA or USAC for the privilege of administering the programs; rather, the FCC

directed its creation and established the regulatory framework which effectively

rendered the USAC a “captive corporation” of the FCC. See A. Michael Froomkin,

Wrong Turn in Cyberspace: Using ICANN To Route around the APA and the

Constitution, 50 DUKE L.J. 17, 79 (2000) (describing the SLC and the RHCC—two

corporations created at the FCC’s direction, in a manner almost identical to USAC—

as “captive” to the FCC, lacking even a pretense of independence). But our analysis

does not stop here.

Assurance relies heavily on the case Department of Employment, where the

Supreme Court held the American Red Cross to be a tax-immune instrumentality.

In reaching this conclusion, the Court emphasized several characteristics of that

organization and its special relationship with the federal government. First, the

Court noted that the Red Cross received “substantial material assistance” from the

federal government, apparently in reference to statutes granting the organization the

use of its headquarters buildings in Washington, D.C. Dep’t of Emp’t, 385 U.S. at

359 & n.11. The Court also found it compelling that the American Red Cross was

established by an act of Congress, and the president appoints the Red Cross’

278820.pdf [https://perma.cc/8NNL-FKFK). Although USAC was established in the same manner, the FCC defended its reliance on USAC, stating, “[W]e find it significant that the GAO made findings only with respect to the creation of SLC and RHCC; GAO did not make any findings concerning the establishment of USAC.” Changes to Board II, 13 FCC Rcd. at 25066; 47 C.F.R. § 54.701(a). 28 principal officer and 7 of its 49 governors. Id. at 359. And finally, the Court pointed

to a proclamation of President Taft saying the Red Cross was “the only volunteer

society now authorized by this government to render aid to its land and naval forces

in time of war” (citing proclamation of President Taft, August 22, 1911, 37 Stat.

1716), as well as several laws permitting the president to rely on relief organizations

such as the Red Cross in coordinating disaster relief efforts. In the Court’s view,

this historic recognition of the Red Cross’ role in supporting governmental activities

counseled in favor of extending its tax immunity to the organization. Dep’t of Emp’t,

385 U.S. at 359.

We see many of these same characteristics present in the relationship between

USAC and the FCC. First, USAC receives substantial material assistance from the

FCC. Indeed, all of USAC’s funding——whether for making disbursements or

covering its own administrative expenses——come from the USF and can only be

drawn with the FCC’s permission. See 47 C.F.R. § 54.715(c) (USAC must submit

quarterly budgets to the FCC for approval, and may not disburse any funds until it

receives this approval); 47 C.F.R. § 54.709(c) (if the actual contributions received

are insufficient to cover USAC’s administrative expenses—including operational

costs and disbursements—it may cover the shortfall using commercial loans secured

with future contributions, but only with the express approval of the FCC). Because

USAC is far more financially reliant on the federal government than even the Red

29 Cross, we find this weighs in favor of recognizing USAC as a federal

Further, although government officers do not participate directly in USAC’s

management, the FCC’s involvement in determining USAC’s governance structure

and membership endorses its status as a federal instrumentality. The FCC appoints

or approves all of USAC’s board members. FCC regulations define the required

composition of USAC’s board and requires that board nominations be submitted to

the FCC commissioner for final approval. 47 C.F.R. § 54.703. The Code of Federal

Regulations likewise subjects the nomination of USAC’s CEO to FCC review and

defines the scope of his or her duties. 47 C.F.R. § 54.704. And if the board of

USAC fails to timely submit a nomination for the position of CEO, the FCC

chairperson is empowered to unilaterally appoint them. Id. We find this

subordination of USAC’s leadership appointments to FCC oversight supports

recognizing USAC as a federal instrumentality.

Lastly, we note that Congress has sanctioned the FCC’s reliance on USAC in

administering Universal Service Programs. Our analysis is again informed by

Department of Employment, as well as the Court’s decision in Standard Oil Co. v.

Johnson, 316 U.S. 481, 62 S. Ct. 1168, 86 L. Ed. 1611 (1942). In Standard Oil, the

Court held United States Army Post Exchanges were tax-immune instrumentalities,

noting the history of congressional acts that, with varying degrees of directness, 30 acknowledged the post exchanges’ work as governmental. See Standard Oil, 316

U.S. at 484. For instance, Congress had appropriated funds for the military to

construct, equip, and maintain buildings to host the exchanges; passed laws requiring

the transfer of leftover funds from disbanded exchanges to the United States

Treasury; and enacted law consenting to state taxation of gasoline sold through

exchanges to private buyers. Id. The Court concluded that the post exchanges had

become “integral parts of the War Department[ that] share in fulfilling the duties

entrusted to it, and partake of whatever immunities it may have under the

Constitution.” Id. at 485.

Assurance points to the FCC’s reliance on USAC to administer the Universal

Service programs delegated to it by Congress since 1997 as proof that Congress has

“acquiesced to USAC’s role in administering the federal government’s objective.”

Pet. for Rev. at 28. Standing alone, we do not find the FCC’s actions particularly

illuminating as to Congress’ views on USAC. However, we note that Congress

recently blessed the FCC’s reliance on USAC in statute, saying, “The Commission

shall have the authority to avail itself of the services of the Universal Service

Administrative Company to implement the Affordable Connectivity Program,

including developing and processing reimbursements and distributing funds to

participating providers.” 47 U.S.C. § 1752(i)(5). As with the U.S. Army Post

Exchanges at issue in Standard Oil, we find it significant that USAC is instrumental

31 to helping the FCC further its mission and carry out its duties and that Congress has

affirmatively sanctioned the unique relationship.

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. While some factors—such as the lack of

government ownership in USAC and the absence of government officials from its

internal management structure—distinguish USAC from other tax-immune

instrumentalities, we do not find the distinctions dispositive. Status as a

governmental instrumentality may exist notwithstanding some factors indicating a

contrary conclusion. See Dep’t of Emp’t, 385 U.S. at 360 (“In those respects in

which the Red Cross differs from the usual government agency—e. g., in that its

employees are not employees of the United States, and that government officials do

not direct its everyday affairs—the Red Cross is like other institutions—e. g.,

32 national banks—whose status as tax-immune instrumentalities of the United States

is beyond dispute.”); see also M‘Culloch, 17 U.S. 316 (holding that the Second Bank

of the United States was a federal instrumentality notwithstanding its charter

dictating that 80 percent of its stock was to be privately held); Dep’t of Emp’t, 385

U.S. at 360 (affirming the tax immunity of the Red Cross, a “nongovernment-

owned instrumentality”).

CONCLUSION

The Lifeline transactions at issue in this case qualify as retail sales under RCW

82.04.050, and the BTA properly identified USAC as the buyer. However, neither

the BTA nor the Court of Appeals properly applied the intergovernmental tax

immunity doctrine. Applying the United States Supreme Court’s framework

for identifying federal instrumentalities, we conclude that USAC is an arm of the

federal government and is therefore tax immune. And because our retail sales tax

places the legal incidence on USAC, it operates to directly tax a federal

instrumentality in violation of the supremacy clause.

Accordingly, we reverse the Court of Appeals and remand to the BTA for

further proceedings consistent with this opinion.

33 WE CONCUR:

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