Mandatory Reading for Telcos — USAC’s Q4 2018 “498/499 Spotlight” Newsletter Available

Each quarter, USAC releases a newsletter called the 498/499 Spotlight.  We at Marashlian & Donahue, PLLC and our affiliated consulting firm, The Commpliance Group, eagerly anticipate these newsletters, as they often contain information and guidance that help us to flesh out and clarify their policies, positions and practices interpreting and implementing a variety of critical, yet unclear FCC regulations.  Even though, technically, USAC shouldn’t be “interpreting” FCC rules at all — instead, all FCC rules with a substantive impact on your business should undergo the public Notice and Comment Rulemaking process.  In fact, several years ago we wrote a law review about USAC exceeding its authority time and again, to little effect. 

But I digress!

All too often, it seems USAC is developing its own understanding of an FCC regulation through a trial and error crucible.  It may be an audit that causes USAC to take a closer look at an imprecise FCC regulation or perhaps some other impetus, but time and time again it seems USAC is engaged in the process of interpretation, not merely implementation.  And you can bet the ranch any interpretation will side in favor of INCREASED exposure of revenue to Universal Service Fund (USF) contributions — not less.  

Now, don’t take this the wrong way.  USAC is doing the best it can do given the impossible job it’s been tasked with: 

Keep a multi-billion dollar government funding program afloat with an ever dwindling revenue stream and without the support of the agency it must answer to — the FCC — which refuses to promulgate clear rules, fails to respond to numerous USAC requests for clarification, and is paralyzed when it comes to taking proactive measures to shore up the Fund through the public Rulemaking process (thus ensuring affected providers and their counsel lack adequate notice of substantive “changes” in the “rules”).

It’s not all negative, though.  We applaud USAC for using its 498/499 Spotlight newsletter to shine light on subject matters that even highly competent telecom lawyers have been challenged to identify, decipher and disseminate with confidence.

Below we list a few of the items addressed in the 4th Quarter 498/499 Spotlight newsletter:

  • Revenue Reporting: Switching from Safe Harbor to Actuals 
    • If you use the safe harbor percent to determine your projected assessable revenue for the quarter on your FCC Form 499-Q, you must also use the safe harbor to determine your actual assessable revenue for that quarter on your FCC Form 499-A. 
    • Filers may change the method they use from quarter to quarter, but they must keep records of how they allocated revenue across the three jurisdictions (intrastate, interstate, and international) for each quarter.
    • Additionally, all entities within a group of affiliated entities must use the same method within the same safe harbor category.
  • Qualifying as De Minimis
    • For calendar year 2018, filers that report less than $62,676.81 of combined interstate and international revenues on Line 423, columns (d) and (e) of the 2019 FCC Form 499-A will be considered de minimis for 2018. This is not an estimate, as the contribution factors for calendar year 2018 are all final.
  • Bottom Line: Reporting a Common Identifier and Affiliates
    • An affiliate, as outlined in the 2018 FCC Form 499 Instructions (Instructions), is a “person that (directly or indirectly) owns or controls, is owned or controlled by, or is under common ownership or control with, another person,” unless otherwise specifically provided. For this purpose, the term ‘owns’ means “to own an equity interest (or the equivalent thereof) of more than 10 percent.”
    • A common audit finding found during a review of FCC Forms 499-A is that the filer incorrectly checked the box on Line 106.1, indicating that it did not have affiliates, when in fact, it does have affiliates or a common holding company, as defined by the Instructions. FCC regulations require all affiliates of a company to be identified by their holding company or controlling entity. 
    • A common audit finding found during a review of FCC Forms 499-A is that the filer incorrectly checked the box on Line 106.1, indicating that it did not have affiliates, when in fact, it does have affiliates or a common holding company, as defined by the Instructions. FCC regulations require all affiliates of a company to be identified by their holding company or controlling entity. 
    • A filer may assume that they don’t have a common identifier because the affiliated companies are not commonly owned and have separate board of directors. However, if the entities share common management (e.g., Chief Executive Officer), that also serves as a controlling element of the entities. Consistent with the Instructions, an affiliate is defined as being commonly-controlled. In this case, designate one of the filers as the “common identifier” and enter that name and EIN on each of the affiliate’s FCC Forms 499-A.
    • Sometimes, filers fail to consider the full extent of their corporate ownership/control structure. Specifically, filers do not evaluate as far up their respective structures as their ultimate parent company and that parent company’s subsidiaries. For example, a filer may be directly owned or controlled by an entity that does not file an FCC Form 499-A, and therefore determines it has no “affiliates” for form reporting purposes. However, the non-filing parent company may be owned by an entity who files an FCC Form 499-A, or has subsidiaries that are FCC Form 499-A filers. These entities could be considered affiliates for FCC Form 499-A reporting purposes and would need to be considered when determining a “common identifier” for Line 106.
    • Conversely, other audit findings reveal that some of the companies which are affiliates fail to include the common identifier name and number in Line 106.1 and 106. 2. Some companies may have as few as two affiliates while others may have over 50 different affiliates. No matter how many affiliates there are, they all must report the same common identifier on Line 106.1 and 106.2.

To be on the safe side of history, we highly recommend subscribing to and reviewing past quarterly newsletters on USAC’s website

And if you think you might have a problem with the “Affiliate” reporting rule (who knows, perhaps you weren’t aware of the 10% passive owner who holds in his portfolio a 10% interest in another 499 Filer), contact us.  We’ll help you examine and develop strategies to resolve your potential exposure — which could be as significant as the loss of the International Revenue Exemption, meaning a ten-fold increase in USF contributions for any affiliated filer falling prey to this hidden trap.

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