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Pending USAC Appeal Could Have Major Impact on Treatment of International Traffic

On July 1, 2016, Telecom Italia Sparkle of North America, Inc. (“TISNA” or “Company”), an international wholesale telecommunications carrier, filed a Request for Review of certain Universal Service Administrative Company (“USAC”) audit findings declaring large sums of revenue TISNA previously considered non-assessable, wholesale revenue to be assessable retail telecommunications revenue for Universal Service Fund (“USF”) contribution (and other funding) purposes.

TISNA is the wholly-owned U.S. subsidiary of Telecom Sparkle S.P.A. (“TIS”), an Italian company.  TISNA purchases and resells wholesale international termination.  According to the Company, all traffic originates and terminates outside of the U.S. (Specifically, the Company maintains that all traffic is foreign-bound, and that it does not “knowingly handle” traffic that originates in the U.S.).

TISNA largely reported its international revenue (derived from sales to other carriers and “carrier-like” customers) as wholesale (in Line 314) of the 2013 Form 499-A.  USAC, however, determined that this revenue should have been reported as ordinary international retail telecommunications revenue in Line 414.1.  Notably, TISNA did not challenge the reclassification of this revenue from wholesale to retail, presumably because it lacked evidence to verify the revenue as “reseller” revenue under the Carrier’s Carrier Rule.  However, during the audit, TISNA concluded that these revenues should have been reported in Line 418.3 on the theory that they qualify as “settlement-like” receipts from foreign-billed carriers.  Under the applicable instructions:

International settlement and settlement-like receipts for foreign-billed service should not be included in U.S. telecommunications revenues.

However,

[I]f the filer receives the foreign-bound traffic in the United States, then it is providing ordinary international service from the United States to a foreign point; receipts from the originating carrier should be reported as revenue on Line 414.

USAC concluded that because TISNA received foreign-bound traffic in the U.S., revenue from the traffic qualified as ordinary international service revenue rather than “settlement-like” receipts. TISNA billed its customers at foreign addresses.  Likewise, TISNA argues that it transmitted only foreign-bound traffic.  The Company can receive IP traffic at Session Border Controllers (“SBCs”) both inside and outside of the U.S.  Due to redactions for confidentiality, we cannot confirm, but we suspect that this fact drove USAC’s finding that TISNA “received” traffic in the U.S.  In its Appeal, TISNA attempts to counter this position by arguing that, according to its traffic studies the “vast majority” of its traffic is received outside of the U.S. (presumably at SBCs located outside of the U.S.) and that the Company does not “knowingly handle traffic that originates in the U.S.”  It is unclear whether TISNA submitted these traffic studies during the course of the audit; it appears that these materials may have been provided to USAC for the first time on appeal. 

Interestingly, TISNA also points to the fact that its termination of foreign traffic is provided for the benefit of non-U.S. end users and billed to those end users by their carriers (TISNA’s reseller customers) outside the United States. Therefore, according to the Company, under both FCC precedent and traditional tax nexus standards, TISNA’s service is not subject to USF contribution obligations.

Presently, the majority of wholesale carriers in the industry continue to treat revenue from foreign-originated “transit” traffic as non-assessable revenue for purposes of not just USF, but all FCC fees.  USAC’s position materially diverges from this common industry practice.  TISNA challenges USAC’s treatment of certain revenue that appears to (at least in part) have been foreign-originated (and billed), received at SBCs in the U.S., and terminated abroad.  TISNA’s Appeal provides an opportunity for the FCC to consider whether traffic that is: (1) billed to foreign customers; (2) originated abroad; (3) transmitted (at least in part) through U.S. SBCs; and (4) terminated abroad qualifies as ordinary international traffic, subject to USF contribution, or as “transit” traffic, exempt from USF fees (but subject to TRS contributions).  The Appeal also allows the FCC to examine whether, in general, the Commission (directly or through USAC) has the authority to assert jurisdiction over and impose USF fees on such traffic.  The Commission’s decisions may have implications for any company with traffic historically considered to be “transit” traffic, as well as any provider of “international” service.  As a result, we suggest that clients monitor this proceeding.

If you have any questions about how a decision in the TISNA proceeding could impact your business or you have any questions about USF contributions generally, please contact Jonathan Marashlian at jsm@commlawgroup.com or Jackie Hankins at jrh@commlawgroup.com.

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