CORRECTION: Yesterday, our Firm distributed a Client Advisory containing an error. This version corrects this error and clarifies that the FCC’s definition of the term “Affiliate” encompasses entities with common or shared ownership interests of 10% or greater, not 10% or less, as indicated in the earlier version. We apologize for any inconvenience caused by this typographical error.
On October 29, 2013, the FCC released a Public Notice stating that the FCC’s Wireline Competition Bureau (“WCB”) is currently seeking comment on proposed changes to the FCC Forms 499-A/-Q, and their accompanying instructions; which telecommunications carriers use to report revenue associated Universal Service Fund (“USF”) contribution obligations. The WCB initiated the request for comment after calls from the telecommunications industry and Universal Service Administration Company (“USAC”) for clarification of the USF reporting process. The FCC has delegated authority to the WCB to revise the Forms 499 and Instructions on an annual basis.
Although the October 29th Public Notice proposes numerous revisions to the FCC Forms 499-A/-Q, and their accompanying instructions, there are two major modifications that will significantly impact telecommunications carriers. First, the WCB proposes revising the Forms 499-A/-Q Instructions to order all “affiliated” filers, as defined by Section 153(2) of the Communications Act, to enter a common identifier (i.e., the “Affiliated Filers Name/ Holding Company Name”) in the relevant sections of Forms 499-A/-Q. Second, pursuant to the FCC’s 2012 Wholesaler-Reseller Clarification Order, the WCB proposes the adoption of “safe harbor” or “reasonable expectation” standards for telecommunications carriers who are classified as “resellers.”
This Advisory discusses these proposed modifications, and how they will impact the USF reporting obligations for those carriers affected by these changes.
Common Identifier Requirement for “Affiliated” Filers:
The WCB proposes the adoption of the Common Identifier Requirement for “affiliated” filers in order to include affiliated companies with a ten percent or greater common or shared ownership within the definition. This seemingly insignificant definitional clarification has major implications – it will potentially cause affiliated filers to lose LIRE eligibility (see note below).
The common identifier language is largely the same in the 2013 and the proposed 2014 versions of the Forms 499-A/-Q Instructions. However, the WCB proposes the addition of the following language to the 2014 version: “[a]mongst a large group of affiliates, this may be the name of the predominant commonly owned or controlled entity.” Furthermore, the 2014 proposed versions deleted all usage of the term “holding company,” and replaced it with “Affiliated Filers Names.” Finally, the WCB proposes the addition of the following language tying the Forms 499-A/-Q with FCC Form 477 obligations: “For those entitles also required to file FCC Form 477, use the same single name that is used in the FCC Form 477 to indicate common ownership or control.”
CAUTION: The WCB’s emphasis on clarifying the Common Identifier disclosure requirements over the past two years carries significant implications for “LIRE Eligible” companies that are “commonly identified” with another telecommunications provider that is NOT eligible for the Limited International Revenue Exemption (“LIRE”). The affiliation of a LIRE Eligible provider with another telecommunications provider that is NOT eligible could result in the loss of LIRE for the affiliate group. The financial consequence of losing LIRE eligibility is a 10-fold increase in federal USF contributions, as all international revenue becomes subject to the 15%+ USF contribution factor, whereas LIRE eligible providers are exempt from paying USF contributions on international revenue that exceeds interstate revenue by an 88:12 ratio.
If your organization believes it may be impacted by the common identifier disclosure requirements and faces potential loss of LIRE eligibility once revenue is pooled across an affiliate group, we urge you to seek competent counsel immediately.
“Safe Harbor”/ “Reasonable Expectation” Standards for “Resellers”:
The WCB proposes the implementation of “safe harbor” provisions in the Forms 499 for telecommunications carriers classified as “resellers.” The Commission defines “resellers” as an entity that (1) incorporates purchased telecommunications services into its own service offerings, and (2) is reasonably expected to contribute to the USF based on revenues from those offerings. Both proposed Forms 499-A/-Q Instructions go on to specify that a carrier is classified as a reseller “if it incorporates purchased wholesale service into an offering that is, at least in part, assessable telecommunications and can be reasonably expected to contribute to the federal universal service support mechanisms for that portion of the offering.”
The WCB states that the “safe harbor” or “reasonable expectation” standard is being proposed pursuant to the 2012 Wholesaler-Reseller Clarification Order. The Form 499-A/-Q Instructions state that a wholesale service provider “may demonstrate that it has a “reasonable expectation” that a customer contributes to federal universal service support mechanisms based on revenues from the customer’s offerings by following the guidance in these instructions or by submitting other reliable proof.” If resellers are able to demonstrate that they meet the reasonable expectation criteria, they will be afforded a “safe harbor” exemption.
Resellers can satisfy the “reasonable expectation” standard by meeting the specific “safe harbor” criteria stipulated in the Form 499-A/-Q Instructions, or if they demonstrate “other reliable proof” that the criteria has been satisfied. Also, Carriers may demonstrate that they have “other reliable proof” that their customer is contributing to the USF in lieu of following the “reasonable expectation” procedures. Furthermore, the Form 499-A Instructions require that eligible carriers satisfy certification procedures. The instructions detail two forms of certifications for services rendered prior December 31, 2013, and after January 1, 2014.
The “safe harbor” designation allows resellers to avoid additional universal service assessments that would result if their revenues were reclassified as end user revenues. The implementation of the “safe harbor” procedures in the 2014 versions enables the Commission to implement the Carrier’s Carrier Rule (“CCR”). Under the CCR, a wholesale provider must treat the revenues of a reseller customer as USF assessable end-user revenues, unless the wholesaler reasonably expects that the reseller contribute directly to the Fund. The FCC clarified in 2012 that under the CCR, in order to classify revenues from wholesale services as carrier’s carrier revenues exempt from USF contributions, the wholesale provider must have a “reasonable expectation” or “affirmative knowledge” (i.e., “other reliable proof”) that its customer is directly contributing to the USF on revenues derived from services purchased from the wholesale provider.
As the FCC has in the past made the Forms 499-A/-Q Instructions the gold standard in CCR compliance, the insertion of the “safe harbor” provisions directly into the 2014 version instructions should prompt resellers to strictly adhere to the “reasonable expectation” standards stipulated therein. Wholesalers are now very unlikely to deviate from the Forms 499 instructions and accept the risk of potential reclassification by relying on the largely untested “other reliable proof” method of compliance. Resellers should now receive exemption certificates that closely mirror the new instructions. Resellers that in the past were exempt based upon more loosely worded certifications may be subject to pass-through fees without strict adherence to the proposed certification language. In addition, the new instructions are indicative of a larger trend toward a service-specific exemption process. Such resellers are likely exposing themselves to liabilities if they are not proactively taking steps to ensure they are appropriately allocating percentages of use of the purchased telecommunications.
The WCB is accepting comments on the proposed modifications to the Forms 499 and their accompanying instructions until November 27, 2013. Clients who would like assistance in filing comments with the WCB pursuant to this Public Notice, or have any USF compliance questions in general, should contact Jonathan Marashlian at firstname.lastname@example.org.