Form 499-A Instructions: The Industry Suggests an Alternative

The FCC seeks comment on proposed changes to the Form 499-A instructions submitted by a group of wholesale carriers.

The Commission is on a constant crusade to ensure that all telecommunications providers who are supposed to be contributing to the Universal Service Fund (USF) are in fact doing so . . . and doing so in the proper amounts. Last month the FCC received some help from the private sector in the form of a letter – filed jointly by eight wholesale telecommunications providers (including Verizon, AT&T, Sprint, CenturyLink and XO Communications) – offering suggested revisions to the “reseller certification” language, and other aspects, of FCC Form 499-A. 

And now the Wireline Competition Bureau (WCB) has solicited input on the proposal.

The USF, of course, is a program which supports several federal, telecom-related, subsidy programs. It is funded through mandatory “contributions” – the guv’mint prefers that you don’t call it a tax, even if it looks like one – from telecommunications providers based on their “end-user” revenues. (More below on what constitutes an “end-user”.) The providers traditionally don’t dip into their own pockets to make the payment; instead, they simply pass the cost along to their customers in a separate line item charge. Still, providers want to be sure that they aren’t overpaying, while the Commission wants to make sure that all are paying their fair share.

Which brings us to Form 499-A.

That’s the elaborate financial form in which providers report their revenues in considerable detail. As noted above, USF contributions are based on revenues from “end-users” – so knowing precisely what an “end-user” is is a necessary first step to completing the form accurately. Unfortunately, determining which customers are “end-users” is not always easy. Even the WCB and the Universal Service Administrative Company (USAC), the office that administers the USF, had problems on that score. Those problems led them to ask the FCC to clarify certain points, which in turn led the FCC to issue a “Wholesaler-Reseller Clarification Order” (Clarification Order) last year. 

The Clarification Order, however, didn’t deliver on the promise of its name. Instead, the Clarification Order expressly instructed the WCB to propose and seek public comment on revisions to wholesaler-reseller guidance contained in the 499-A instructions including, specifically, new sample language for use on “reseller certifications”. (Such sample certification language is of particular importance because the FCC considers it part of the “safe harbor” procedures for obtaining valid reseller certifications.) WCB duly proposed some language and asked for public comment, but since then no new sample language has been formally adopted.

What’s the fuss about reseller certifications, you ask? Good question, but you may be sorry you asked.

Since USF contributions are based on revenues from end-users, it’s essential to be able to keep careful track of where a provider’s revenues are coming from and whether the source of the revenues is an “end-user” or not. As it turns out, that’s not as easy a question as it might seem.

Some companies purchase telecommunications, incorporate those telecommunications into their own service offerings, and then provide those service offerings to others. These companies are often referred to as “resellers.” Make sense?

Companies that provide telecommunications to resellers are often referred to as “wholesalers.” A reseller can also be a wholesaler if it is providing services to other resellers. A reseller would not be considered a wholesaler if it’s providing services only to end-users. Still following along?

A reseller is (usually) not considered an end-user. Since companies are obligated to contribute to USF only on services provided to end-users, wholesalers that provide services only to resellers are off the hook (usually). Good to be a wholesaler, right?

But wait… there’s more.

Sometimes, a reseller who should be contributing to the USF program doesn’t do so for any of a number of reasons, not all of them valid.  When that happens – regardless of the reseller’s reason for not contributing – the FCC requires that wholesalers treat (or re-classify) that reseller as an end-user for USF reporting and contribution purposes. In other words, a wholesaler is on the hook for USF contributions on revenue derived from services the wholesaler provides to non-contributing resellers.

But how is a wholesaler supposed to know whether any reseller it’s dealing with happens to be a “non-contributor” – that is, whether the wholesaler must treat any resellers as “end-users” for USF purposes? 

Can you say “reseller certification”?

The FCC requires that wholesalers obtain these certifications from resellers at least annually. Among other things, the reseller certification is supposed to reflect whether a reseller is actually reporting its own end-user revenue and making direct contributions to the USF program on that revenue. If a reseller legitimately certifies that it has properly taken care of its USF contribution responsibilities (which can usually be verified through the FCC’s website/database), then the wholesaler won’t be responsible for USF contributions generated from services provided to that reseller.

For many years now, the industry has operated under a presumption that, if a reseller is contributing directly to the USF program, a wholesaler will not be responsible for USF contributions on any services provided to that reseller. But in the Clarification Order, the FCC held that wholesalers must verify that resellers are contributing to the USF program on essentially a service-by-service level.

That wouldn’t be too difficult in some weird Alternate Universe where resellers invariably incorporate 100% of a telecommunications input (purchased from a wholesaler) to provide only either (1) a service that will be subject to USF contributions, or (2) a service that is not subject to USF whatsoever. But here on the Real Planet Earth, companies are likely to incorporate a single telecommunications input into a variety of product and service offerings, not all of which are necessarily subject to USF contributions.  That makes the verification expected by the FCC vastly more difficult.

In response to the Clarification Order, the WCB’s original proposals for revising the 499-A instructions (see page 24) contemplated, in part, that resellers should certify the exact percentage of a wholesale telecommunications input on which resellers were actually making USF contributions. Presumably, wholesalers would then be responsible for USF contributions on the remainder if the percentage was under 100%.

Needless to say, the industry was not pleased with this proposal, or many of the WCB’s other proposed changes to the reseller certification portion of the 499-A instructions. The recent proposal submitted by the eight industry participants (each with significant wholesale operations) constructively attempts to simplify the certification process (as much as possible, anyway). The industry proposal contains, among other things, modified “sample reseller certification language” to be included in the 499-A instructions. Wholesalers are not obligated to use the sample language contained in the 499-A instructions, but doing so offers a safe-harbor presumption of reasonableness for ensuring that resellers are indeed contributing to the USF program on purchased services. (Of course, that’s also contingent on a reseller being able to attest under penalty of perjury that the sample certification language is true and accurate with respect to its operations.)

Will the WCB ultimately adopt the proposed language for the next iteration of the 499-A instructions? We can’t say for certain. What is clear, though, is that the previous “safe-harbor” reseller certification language is only good until the end of this year. So whatever changes are in store will likely (and hopefully) happen soon, or wholesalers will be left without certainty on how to ensure compliance with USF contribution requirements.

If you have specific thoughts or comments on the proposed changes, the Public Notice sets a comment deadline of September 6, 2013, and a reply comment deadline of September 13.

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