As of January 1, 2014, the “Entity-Wide” Universal Service Fund exemption process has been supplanted by a “Service-Specific / Circuit-by-Circuit” process that requires wholesalers to obtain more granular evidence regarding downstream customers’ and resellers’ use of their wholesale telecommunications prior to reporting such revenue as exempt “carrier’s carrier” revenue in their FCC Form 499s.   The consequences of non-compliance with the FCC’s clarified rules governing USF contribution obligations and exemptions, as among wholesalers and resellers, can be severe and may include revenue reclassification and imposition of additional USF contributions by USAC, the USF administrator.

Our firm has already received client feedback indicating that their wholesale suppliers are requesting certification (under penalty of perjury and other legal jeopardy) as to their specific use of purchased telecommunications.  For example, one firm client received a notification from a supplier containing the following directives:

Providers of most interstate and international telecommunications services and interconnected Voice over Internet Protocol (“VoIP”) services are required to contribute to the Federal Universal Service Fund (“FUSF”).  Company XYZ and its successors and assigns (“Company XYZ”) is required to contribute on behalf of its customers for the non-exempt services that such customers purchase when they do not contribute directly, and as permitted by the Federal Communications Commission (“FCC”), Company XYZ recovers such amounts from those customers.  The rates that Company XYZ charges for the services it sells do not include any FUSF contribution amount; rather, Company XYZ’s recovery is performed via pass-through billing.

The purpose of this exemption certification form (“Certificate”) is to identify services for which an exemption from FUSF contributions may be appropriate.  Pursuant to FCC rules, Company XYZ relies on your certification in this Certificate to determine which, if any, services that you purchase may be exempt from FUSF contributions and pass-through amounts.  You are responsible for the accuracy and completeness of this Certificate, and for keeping it up-to-date at all times throughout the term of your agreement(s) with Company XYZ.  If you do not submit this Certificate, if you do not keep your Certificate current, or if the Certificate that you submit is inaccurate and/or incomplete, you will be subject to FUSF pass-through for all services that must be reclassified. 

Pursuant to FCC rules, Company XYZ requires customer Certificates that specify the treatment of all services associated with each particular Billing Account Number (“BAN”).  This Certificate performs that function.  Any services not purchased for resale must be ordered on a BAN different from the exempt BAN(s) and listed on the BAN Attachment.

Whether you are a wholesaler of telecommunications, a reseller or both, we advise clients to be extremely diligent and cautious with respect to their compliance with the FCC’s clarified USF exemption rules.

For wholesalers, it is critically important to expeditiously develop and implement USF Exemption Policies and Processes.  Any delay can result in uncertainty with respect to the appropriate treatment of revenue for USF contribution purposes and this uncertainty adds to the risk of revenue reclassification by USAC.  For resellers and other consumers of telecommunications, it is equally important to ensure your USF pass-through relationship with your wholesale suppliers is accurate and lawful, as the consequences to your business may include breach of contract, claims of fraud, back-billing and other economic harms.

To assist clients with their efforts to comply with the clarified USF exemption requirements, our firm has formed an internal task force that will provide the following services:

• Design, develop and assist with the implementation of USF Exemption Policies and Procedures that are appropriate for your unique business;
• Review USF exemption forms and certifications provided by your suppliers and provide guidance and advice on the appropriate manner to complete such exemption forms;
• Analyze and advise on the practical economic consequences of your responses to wholesale supplier USF exemption forms and evaluate options to address the same.

If you require assistance from our firm’s USF Exemption Task Force, please contact Jonathan S. Marashlian at jsm@commlawgroup.com or by phone at 703-714-1313.

Background and Explanation of FCC’s Clarified USF Exemption Rules

Since the inception of the Universal Service Fund (“USF”) program in the late 1990s, the USF program administrator (Universal Service Administrative Company or “USAC”) has relied upon an “Entity-Wide” exemption process to determine when a reseller carrier can be exempted from wholesale supplier USF pass-through surcharges.  In short, if a downstream reseller certifies that it is contributing to the USF, the wholesaler may exempt the reseller from all USF pass-through surcharges, even if the reseller is only remitting contributions on a fraction of the revenue derived from services purchased from the upstream wholesaler, it was exempted from ALL wholesaler pass-throughs.  On January 1, 2014, the era of “entity-wide” USF exemption came to an end. The regulatory regime has been replaced by a “Service-Specific” or “Circuit-by-Circuit” specific exemption process, the details of which are still being ironed out by the FCC.  Nonetheless, service providers must take steps to comply with the changes now. Otherwise, your company may be caught off-guard and may find itself paying suppliers and carrier partners significantly more in USF contributions than ever before.  And on the flip side, if your company is a wholesaler, you may find yourself exposed to USAC audit and revenue reclassification that may result in your company being ordered to pay USF contributions that your resellers/carrier customers failed to remit (plus interest penalties on under-remitted amounts).

Under USAC’s pre-2014 application of the FCC’s carrier-to-carrier USF exemption rules, a service provider merely had to certify to its suppliers that it was exempt from USF pass-throughs on an entity-wide basis.  However, in its Wholesaler-Reseller Clarification Order (released in November 2012), the FCC clarified that the “entity-wide” exemption process was never the intention of its rules.  As had been originally defined in 1997, in order for a wholesaler to exempt a reseller from pass-throughs, the wholesaler must have evidence that the reseller customer both “(1) [incorporates] the purchased telecommunications services into its own offerings, and (2) can reasonably be expected to contribute to support universal service based on revenues from those offerings.”  Despite language that has always intimated a “service-specific” exemption procedure, neither USAC nor the industry ever interpreted the FCC rules to require anything more than “entity-level” exemption.  This historically lax interpretation and application of FCC rules will soon change, thus making it more difficult for resellers to qualify for exemption from USF pass-throughs and placing a greater burden on wholesalers to pass-through surcharges to any customer failing to supply adequate proof of exemption on a service-by-service, circuit-by-circuit basis.

When introducing its new “Service-Specific” / “Circuit-Specific” process, the FCC made it a point of emphasis to note that the definition of reseller will not change.  Though that definition remains the same, the interpretation of that definition has now changed. Under the new rules, the FCC will direct USAC to look beyond whether a company is certified as a reseller.  Instead, USAC is to be more comprehensive and thorough in its analysis, considering other factors under a totality of the circumstances test.  USAC can and must look beyond mere compliance with the instructions found on Form 499-A, considering “other reliable proof” that substantiates a reseller designation.

This Service-Specific exemption process will understandably prove more rigorous for both wholesalers and resellers than the current system.  Where previously and currently, wholesalers could simply determine that an entity is a reseller and assess USF charges accordingly, soon those wholesalers must identify the specific end user services for which their wholesale services are used.  From there, they must determine which services are exempt from being assessed a USF charge and which services are not exempt.

FCC Still Considering Comments on USF Exemption “Safe Harbor” Language and Procedures

AT&T, Verizon, CenturyLink, Sprint, BT Americas, XO, Orange and BCE Nexxia joined together to sign an ex parte letter sent to the FCC in July.  This ex parte letter requested that the FCC adopt new instructions that clarify the rules and policies governing the soon to be revised USF exemption process.  Specifically, the letter recommended the following addition to the Form 499-A instructions:

“At the filer’s discretion, the filer may rely on certificates that specify any of the following: (1) that all services purchased by the customer are purchased for resale pursuant to the certificate (“entity-level certification”); (2) that all services associated with a particular billing account, the account number for which the customer shall specify, are purchased for resale pursuant to the certificate (“account-level certification”); (3) that individual services specified by the customer are purchased for resale pursuant to the certification (“service-specific certification”); or (4) that all services except those specified, either individually or as associated with a particular billing account, the account number(s) for which the customer shall specify, are purchased for resale pursuant to the certificate.”

Much of the language proposed by this industry group has been incorporated into “proposed” Form 499-A Instructions.  However, the final 499-A Instructions have not yet been released, resulting in continued uncertainty.

Regardless of whether the FCC ultimately adopts the industry group’s recommended language in the Form 499-A Instructions, the Service-Specific process has already gone into effect as of January 1, 2014.

Please contact the attorney responsible for your account with any questions regarding this Advisory, or contact Jonathan S. Marashlian at jsm@commlawgroup.com.