Introduction

In the telecommunications industry, a common misperception exists about the regulatory and tax obligations of non-facilities-based VoIP service providers. This includes resellers and companies that private label services from platforms such as SkySwitch, Viirtue, VOIP Innovations, and White Label Communications. Contrary to widespread belief, these entities face substantial direct obligations to the government, irrespective of their “De Minimis” status under the FCC’s Universal Service rules.

Defining a Telecommunications Reseller

According to the Federal Communications Commission (FCC), a “telecommunications reseller” is a company that purchases telecommunications services from another entity and then resells or offers those services to end-users or other resellers. Essentially, resellers do not own or operate the underlying infrastructure used to provide the services but rely on the capabilities of others.

The Myth of Non-Regulation

It is mistakenly believed that as long as resellers pass on the regulatory fees and taxes from their suppliers to their customers, they meet all regulatory requirements. This misunderstanding leads to assumptions of minimal regulatory oversight.

FCC JURISDICTION AND REGULATORY OBLIGATIONS

Registration Requirements

All interstate telecommunications and interconnected VoIP providers must:

• Register with the Universal Service Administrative Company (USAC).
• Obtain a Filer ID.
• Annually file FCC Form 499-As for revenue reporting to comply with contributions to the Telecommunications Relay Services Fund, NANPA, LNP administration, and other FCC regulatory fees.

This requirement persists even for providers considered de minimis regarding the Universal Service Fund contributions.

Comprehensive Regulatory Compliance

Providers must adhere to a broad spectrum of FCC regulations, including:

• CALEA (Communications Assistance for Law Enforcement Act)
• CPNI (Customer Proprietary Network Information)
• CVAA (Twenty-First Century Communications and Video Accessibility Act)
• Mandatory 911 service provisions
• Outage reporting
• Form 477 reporting (Local Telephone Competition and Broadband Reporting)

State and Local Obligations

Additionally, paying regulatory fees to suppliers does not exempt these companies from having to register and pay taxes and fees directly to various state and local governments, including departments of revenue, 911 fund administrators, and public utility commissions.

Historical Enforcement Actions by the FCC

The FCC has consistently enforced compliance, demonstrating that mere reliance on upstream providers is insufficient. Notable cases include:

• Cardinal Broadband, LLC: In 2012, Cardinal was fined $25,000 for failing to provide necessary E911 services, illustrating the FCC’s stance that resellers cannot delegate their compliance responsibilities.
• Terracom, Inc. and YourTel America, Inc.: These companies faced a consent decree in 2014 due to violations of privacy laws (CPNI), which resulted in a $10 million penalty.
• BigZoo.com Corporation: Faced a forfeiture order for failing to contribute to the Universal Service Fund and other required reporting, emphasizing the necessity for proper financial disclosures and contributions.

Cost of Non-Compliance Extends Beyond FCC Enforcement

The consequences of non-compliance with regulatory requirements extend far beyond FCC enforcement actions, impacting companies in significant, often unforeseen ways. One critical area of compliance under recent legislation involves the TRACED Act and the Telephone Consumer Protection Act (TCPA). These laws mandate that all Voice Service Providers, including pure resellers, must register in the Robocall Mitigation Database and file Robocall Mitigation Plans (RMPs) that demonstrate effective policies and procedures to prevent illegal and harmful robocall traffic. Companies that fail to meet these requirements by late May 2024 risk having their traffic blocked by downstream carriers. This blocking can severely disrupt operations and damage relationships with customers and other stakeholders, representing a substantial operational risk.

Additionally, the Universal Service Administrative Company (USAC) enforces compliance with registration and filing requirements, which can result in significant financial penalties for delayed action. For instance, a reseller that becomes operational but delays its registration until it exceeds the de minimis threshold for contributions faces escalating automatic late penalties. These penalties compound annually and can quickly exceed the costs of initial compliance. For example, a de minimis reseller that failed to register upon market entry in 2019 could face cumulative penalties amounting to $18,000 over five years (1 year = $1,200, 2 years = $2,400, 3 years = $3,600, and so on). Such financial burdens can become a significant drain on resources and are avoidable with timely compliance.

Moreover, compliance issues often surface during corporate transactions, such as when a company is being sold or acquired. In these scenarios, due diligence processes typically uncover any lapses in regulatory and tax compliance, which can significantly impact the valuation of the business. Potential buyers factor in these liabilities by reducing purchase prices, demanding substantial indemnifications, or imposing holdbacks. The cost of rectifying years of non-compliance often far exceeds what it would have cost a company to adhere to regulations from the beginning, not only in direct financial terms but also in terms of lost business opportunities and damaged reputations. Thus, maintaining compliance is not just a legal necessity but a strategic imperative for sustaining and growing business value.

CONCLUSION AND CALL TO ACTION! 

The belief that non-facilities-based telecommunications and over-the-top VoIP providers, including white labelers, are exempt from significant FCC, state and local regulations and taxation is incorrect and risky. It is crucial for all providers in this sector to comprehensively understand and adhere to their regulatory and tax duties, consult with legal counsel, and maintain compliance to avert potential fines, legal challenges, reputational harm and other adverse consequences.

This advisory aims to clarify the responsibilities of such providers and encourage all stakeholders within the telecommunications industry to reassess and align their compliance strategies with federal, state, and local rules & regulations.

Contact Us

If you have any further inquiries or require assistance with compliance-related matters, we invite you to visit our website at www.CommLawGroup.com. Additionally, we encourage readers to download one of our many compliance resources available, including our VOIP Compliance Guide, which provides further insights into navigating the regulatory landscape effectively. For direct assistance, please do not hesitate to contact us through the information provided on our website.

DISCLAIMERS: This article is provided for informational purposes only and does not constitute legal advice. Nothing herein creates an attorney-client relationship between the reader and Marashlian & Donahue, PLLC, The CommLaw Group. It is important to note that this content may be considered legal marketing in certain jurisdictions. For specific legal issues, questions, or situations, we strongly advise consulting with competent and qualified legal counsel to obtain advice tailored to your particular circumstances.