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Problem

When you assign KSC as WSUS all hosts are not able to download anything from Microsoft Store. It is a Microsoft's design limitation.

Description

When KSC acts as WSUS group policy (GPO) "DoNotConnectToWindowsUpdateInternetLocations" is applied to the hosts. It is needed to prohibit hosts from downloading updates from the Internet (it is relevant for Windows 10/Server 2016). Such limitation blocks the ability to download applications from Microsoft Store.

Microsoft explanation

More details about this behavior can be found in the following link:
https://cloudblogs.microsoft.com/windowsserver/2017/01/09/why-wsus-and-sccm-managed-clients-are-reaching-out-to-microsoft-online/

Solution

In case if you need this ability back and don't mind hosts download updates from the Internet, you can apply the following solution:

A restart of KSC Server might be required in some cases.