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Mandatory Reading for Telcos — USAC’s Q1 2019 “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 the primary item addressed in the 4th Quarter 498/499 Spotlight newsletter — Reporting Revenue from Resellers:

Beginning in December 2018, USAC has provided a Reseller Certificate template on its website for companies to use. Previously, filers designed their own certificates based on the information outlined in the FCC Form 499-A instructions. A recap of the entire process follows.

The FCC has defined a “reseller” as a telecommunications carrier or telecommunications provider that: 

(a) incorporates purchased telecommunications into its own offerings; and 

(b) can reasonably be expected to contribute to federal universal service support mechanisms based on revenues from those offerings. 

Specifically, to report revenues as reseller revenue in Block 3 of the FCC Form 499-A, the customer must be: 

  1. Purchasing service(s) for resale, at least in part, and incorporating the purchased services into its own offerings which are, at least in part, assessable U.S. telecommunications or interconnected VoIP service; and
  2. Either directly contributing or have a reasonable expectation that another entity in the downstream chain of resellers directly contributes to the federal universal service support mechanisms on the assessable portion of revenue from offerings that incorporate the purchased services.

Each of the following conditions must be met if a filer intends to report its revenues from other carriers as reseller revenue in Block 3 and, therefore, have that revenue exempt from its universal service contribution base:

First Condition

The first condition states that the customer is incorporating at least a part of the service that it is purchasing into its own telecommunications offering. 

Example 1 

If a customer purchases a T1 circuit, it will meet the first part of the definition if it is using at least part of the circuit for voice or other assessable telecommunications services. 

It will not meet the first part of the definition, however, if it is using 100% of the circuit for internal purposes or reselling it as internet or part of an enhanced product. 

In this example, the same reseller customer can be treated as both a reseller and an end user, depending on the purpose of the circuits that it is purchasing. 

Second Condition 

The second condition states that either the customer or another entity in the downstream chain of resellers directly contributes on the revenues for that service. This difference is crucial, because the FCC requires a wholesaler to collect the USF fees from a reseller of its services if that reseller is de minimis

Example 2 

If the same customer purchases another T1 circuit but is not a direct contributor, then it will not meet the second part of the definition. All services purchased by the customer, even the services resold as 100% telecommunications, must be reported as end-user revenue in Block 4 of the form. 

 

Procedure 

The filer must demonstrate that it has a reasonable expectation that the revenues it reports as reseller revenue are for services that meet both parts of the definition. This process must be repeated every year. The FCC has provided a safe harbor procedure in the FCC Form 499 instructions, specifying the following requirements: 

1.    Filers must have, at a minimum, the following information about resellers: 

  • 499 Filer ID
  • Legal name
  • Legal address
  • Name of contact person
  • Phone number of contact person
  • Annual certification by the reseller regarding its reseller status.

2.    Annual Certificates. A filer may demonstrate that it had and has a reasonable expectation that a particular customer is a reseller with respect to purchased service(s) by providing a certificate signed each calendar year by the customer that:

  • specifies which services the customer is or is not purchasing for resale pursuant to the certificate; and
  • has wording consistent with the following language, which comes from the 2018 instructions, pages 37 – 38:

 

I certify under penalty of perjury that the company is purchasing service(s) for resale, at least in part, and that the company is incorporating the purchased services into its own offerings which are, at least in part, assessable U.S telecommunications or interconnected Voice over Internet Protocol services. I also certify under penalty of perjury that the company either directly contributes or has a reasonable expectation that another entity in the downstream chain of resellers directly contributes to the federal universal service support mechanisms on the assessable portion of revenues from offerings that incorporate the purchased services. 

 

If a company is audited, USAC will expect to see these certification documents. Filers should keep them on file for at least 5 years. If a filer is missing certificates for companies it reported as resellers with revenue reported in Block 3, that revenue will be moved to Block 4, and the company will be reclassified as an end user.

Common Audit Findings

1.    No Filer ID – One of our most common audit findings is that the carrier does not have a Filer ID. Since a Filer ID is essential to filing an FCC Form 499, a filer cannot credibly establish that the customer is a direct USF contributor if that customer is not filing the FCC Form 499.

2.    Certification is not service specific – The 2015 FCC Form 499-A was the first form for which reseller certificates had to identify the specific services that were being resold (at least in part) as applicable telecommunication services. USAC’s review of filers’ certificates shows that many filers have not updated their certificates to be service-specific. The FCC Form 499-A instructions, provides examples of how to submit service-specific certificates: 

  • Entity-Level: all services purchased by the customer are or will be purchased for resale pursuant to the certificate;
  • Account-Level: all services associated with a particular billing account — the account number for which the customer shall specify — are or will be purchased for resale pursuant to the certificate;
  • Service-Specific: individual services specified by the customer are or will be purchased for resale pursuant to certification; or
  • Exception-Specific: all services except those specified either individually or as associated with a particular billing account, are or will be purchased for resale pursuant to the certificate. The certificate shall specify the account number(s) of specific customers included in the exception.

3.    The certificate is not for the specific time period – all certificates should be obtained on an annual basis. Certificates must state the calendar year that the certificate covers and must be signed before the filer submits the FCC Form 499-A.

Learn More

For a complete listing of common audit findings, please bookmark the Beneficiary and Contributor Audit Program page which outlines specific contributor related revenue reporting issues that occur on the FCC Form 499-A and how to address the issue in order to avoid any mistakes.

 

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