The recent Washington Supreme Court decision in Assurance Wireless USA, LP f/k/a Virgin Mobile USA, LP v. Washington Department of Revenue could have favorable tax implications for the telecommunications industry.
Case Background
In exchange for providing wireless telecommunications services to low-income customers at a reduced rate, Assurance Wireless is entitled to receive a reimbursement of $9.25 per subscriber of Lifeline receipts.
Lifeline is a support program within the Federal Universal Service Fund (FUSF), which is funded by contributions from regulated telecommunications providers, and administered by the Universal Service Administrative Company (USAC). USAC is an independent nonprofit corporation created solely to administer FUSF.
The Washington Department of Revenue audited Assurance Wireless and assessed retail sales tax on the Lifeline receipts. Assurance Wireless challenged the assessments, arguing that the transactions didn’t rise to the level of taxable retail sales, and that even if a retail sale has occurred, imposing the tax on USAC receipts would be equivalent to taxing the federal government in violation of the intergovernmental tax immunity doctrine.
Ruling Details
The Washington Supreme Court reversed the Washington Court of Appeals decision and ruled that USAC operated as an instrumentality of the federal government and was immune from state taxation.
The court found that the Lifeline transactions were retail sales because Assurance Wireless received valuable consideration for the services it rendered. However, the court concluded that with respect to the $9.25 Lifeline receipt, USAC was the buyer legally obligated to pay the taxpayer for these services rather than the recipient of the wireless phone services, because USAC had the legal obligation to pay Assurance Wireless the reimbursement.
The court concluded that USAC was effectively rendered a captive corporation of the federal government because its sole purpose was to effectuate a government program and agreed with the taxpayer’s argument of intergovernmental tax immunity.
Looking Forward
The arguments supported in this decision could affect companies that receive funds from other FUSF programs, as well as other industries that participate in government-funded programs.
This decision doesn’t appear to limit Washington’s ability to impose business and occupation tax on recipients of FUSF monies.
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For more information on how this ruling may affect your company or how to leverage potential opportunities it may create, contact your Moss Adams professional.