Form 499-A Instructions: Comment Sought (Again) on Proposed Changes

The latest version of the FCC’s clarification on reseller certification language recommended for use by wholesale telecommunications providers is now available for comment.

The FCC’s Wireline Competition Bureau is seeking comment on another round of proposed changes to the Form 499-A and Form 499-Q instructions. The latest proposals contain (among a few other things) what many hope will be the final version of the “reseller certification” language for use starting next year. (Reseller certifications are what wholesale telecommunications providers rely on to ascertain applicable Universal Service Fund (USF) contribution obligations.)

Our regular readers will recall that the Commission’s “Wholesaler-Reseller Clarification Order” from nearly a year ago promised clarification to the reseller certification language in the upcoming Form 499-A instructions.  As we observed last March, that clarification was missing from the instructions released earlier this year. Then in August we reported that a group of wholesale telecommunications providers had offered suggested revisions to the reseller certification language and other aspects of the FCC Form 499-A instructions.

(If you need to refresh your recollection of the information in our previous posts, now would be a good time to go back through them again. That background will be helpful for what follows.)

After considering the suggested revisions (and the comments filed in response to them), the FCC seems finally to be settling in on a new set of (proposed) instructions and reseller certification language for use starting in 2014. The much awaited clarification language proposed in the new instructions largely reflects the suggestions of the wholesale telecommunications providers. Notably, the proposed language does not require service specific certifications (i.e., certifying that 100% of a service is being incorporated for resale as USF assessable telecommunications) as contemplated by the Bureau’s original proposal last year. Rather, wholesale providers will be able to obtain certification in a number of ways – including on an “entity-level” or “account-level” (among others) – as long as a portion of the services sold by a wholesale provider is being resold as USF assessable telecommunications.

The new reseller certification language also incorporates another potentially significant change not originally included in any of the prior proposals. In response to the proposals of the wholesale providers, another telecommunications provider also suggested language to accommodate the fact that wholesale telecommunications providers often offer services to other wholesalers. Indeed, there could be many wholesalers in the chain before service is ultimately provided to a “reseller” that is serving an end-user consumer. Previous iterations of the reseller certification language contemplated only that a wholesale provider’s immediate customers would be the ones offering services to end-users (and thus with the obligation to contribute directly to the USF program). The new proposal contemplates the possibility “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.” This is likely a welcome addition for many middle-of-the-service-chain wholesale providers who have, in the past, had problems obtaining certifications from (and providing certifications to) other wholesale-resellers using the previously approved language.

If you have specific thoughts or comments on the proposed changes, the Public Notice sets a comment deadline of November 27, 2013. Apparently, the Bureau is not providing any opportunity for reply comments. We expect that the Bureau will be trying to issue the final, approved version of these instructions before the end of the year because wholesalers must implement the new reseller certification language at the beginning of 2014.

[SIDE NOTE: The Bureau is also proposing some less polite non-substantive changes to the Form 499-A instructions.  Previous iterations of the instructions politely requested Form 499 filers to comply with certain requirements, such as “Please provide an original officer signature…” The word “please” has been completely stricken from the instructions in the latest proposal. Should we be offended?]

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.

FCC Form 499-A: Updated and Ready to File by April 1

The newly revised FCC Form 499-A and its accompanying instructions are now available, but some expected revisions on wholesaler-reseller USF exemption guidance are conspicuously absent.

It’s March! Spring is right around the corner, the excitement of college hoops is in the air, and you only have a few weeks left to come up with a clever April Fools’ Day prank to play on your coworkers. (If you’re short on novel – and safe – ideas, here’s a classic.) As if that’s not enough excitement, telecommunications providers get to experience the fun of preparing the annual FCC Form 499-A filing due by April 1. 

The FCC has released its annual update of the Form 499-A, including changes to the Form’s accompanying instructions. All joking aside, there really are some interesting aspects to this year’s new 499-A – including some anticipated “guidance” that is conspicuously absent. We’ll discuss that more after we cover some of the 499-A basics.

When to file? 499-A filings are due by April 1. If you’ve filed the 499-A before, you know it’s a process that has undoubtedly contributed to the madness in March. It’s as fun as filing your taxes but with virtually no possibility of getting a deadline extension. So don’t be a fool, and don’t miss the April 1 due date – the potential penalties are no joking matter.

Who has to file? With very few exceptions, telecommunications providers of all kinds must file the 499-A. This includes, for example, providers of wireless and wireline telephony, interconnected and non-interconnected VoIP service, audio bridging service, prepaid calling cards, and satellite services. A common misconception is that the 499-A and other FCC requirements don’t apply to non-voice/data services or to companies that simply buy and resell the services of other carriers. Don’t be fooled (there’s that word again): the definition of telecommunications is quite broad (basically, any transmission of information could fit) and the 499-A’s applicability is vast.

(REMINDER: The FCC’s new accessibility-related recordkeeping certification is also due by April 1. If you’re required to file the FCC Form 499-A, you’ll most likely need to also file this new certification. Sorry, not joking here, either.)

Where and how to file? You can still file the 499-A the old-fashioned way, on paper. Filings are submitted to the Universal Service Administrative Company (USAC), not directly to the FCC. If you’re a veteran filer (i.e., you’ve filed a Form 499 by paper before), you can even submit the 499-A online via the USAC website. To file online, you’ll need a computer and a company officer with an email address.

What to file? Filers must report revenue from the prior calendar year (the upcoming filing will report 2012 revenue). Of course, revenue must be reported on the 499-A in a very special – and by “special” we mean “complex” – way. You can’t just copy and paste from your tax returns or financial statements. Revenue has to be reported by categories of service and sources of revenue (i.e., whether it’s derived from end-users or other providers, such as resellers). Revenue must also be allocated on the 499-A to intrastate, interstate and international jurisdiction. There are rules for how to do all this, some of which are described in the instructions which accompany the Form 499-A. Other nuances of completing the 499-A may necessitate consulting the FCC’s regulations or the numerous orders on federal Universal Service Fund (USF) reporting and contribution compliance.

Why file? It’s all about the money! The FCC wants to know how much money is generated from telecommunications. More significantly, the 499-A is used to calculate contributions owed by telecommunications providers to various federal programs. These programs include the USF, Telecommunications Relay Services (TRS) Fund, North American Numbering Plan (NANP) Fund, Local number Portability (LNP) Fund, and the FCC’s Interstate Telecommunications Service Provider (ITSP) Regulatory Fees. Since money is involved, it’s important to report and allocate revenue properly on the 499-A. If you report revenue incorrectly, it could lead to over-contributions or under-contributions to the various federal programs. Under-contributing sounds great (right?), except it could also lead to those pesky penalties we mentioned earlier. If you’re required to file but don’t (even if you claim you didn’t know about the requirement), you will also be subject to – guess what – potential penalties.

What’s so interesting about the 499-A this year?

For starters, this year marks the first time that the FCC has released an updated Form 499-A after letting the public have an opportunity to provide feedback on proposed revisions to the Form and its instructions. If you’ve ever tried to complete the Form 499-A, or any form for that matter (just ask some Canadian Senators), this makes great sense (unlike many of the forms/instructions themselves). What better way to make a form better than to solicit input from those who will be completing it?

According to the Wireline Competition Bureau (WCB) last year, getting public feedback on the proposed revisions would serve “to promote clarity, transparency and predictability.” Again, that makes great sense! So why, then, is this the first time the WCB has sought public comment on proposed revisions to the 499-A form/instructions?

Um, because the Commission told it to, in the so-called Wholesaler-Reseller Clarification Order (we’ll just call it the Clarification Order for short). Basically, nobody had told the WCB it had to seek feedback on revisions to prior 499-A forms and instructions, so previously it hadn’t bothered to. But “to promote clarity, transparency and predictability” sounds better than “we’re doing this now because we were told we had to.”

As its nickname suggests, the Clarification Order focuses mainly on revenue reporting issues – questions dealing with services provided by wholesalers (a/k/a underlying carriers or carrier’s carriers) to reseller carriers. The 499-A’s instructions supposedly contain “guidance” on the parameters and processes wholesalers should utilize to determine whether revenue should be reported as exempt from or subject to USF contributions. But those instructions have historically left filers (and USAC – the entity responsible for administering the USF program) unclear on how to make the determination in a manner which would satisfy the FCC. (Properly determining revenue reporting for USF purposes is pretty important, especially since the rate at which USF contributions are calculated has been as high as 17.9% in the past year!)

Accordingly, the Clarification Order attempted to clarify the process. Among the particulars up for clarification: the “reseller certifications” (a/k/a USF exemption certificates, verifications of USF contributor status, among other things) used by the telecommunications industry to help determine ultimate responsibility for USF contributions and how to report revenue on the Forms 499. 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. (The new sample certification language is of particular importance because the FCC considers it part of the “safe harbor” procedures for obtaining valid reseller certifications.) Since the WCB had to obtain feedback on these revisions anyway, it opened the floor to comments on all of the proposed changes.

Now we turn back to the changes on this year’s Form 499-A and accompanying instructions.  Guess what’s missing? That’s right, the sample reseller certification language which formed the bulk of the WCB’s proposed revisions to the wholesaler-reseller guidance portion of the 499-A instructions somehow didn’t make the cut. Instead, the new instructions essentially say that wholesalers/resellers can rely upon suggested reseller certification language contained in last year’s 499-A instructions, at least until the end of 2013. What should filers do after the end of this year? No word. Why did the guidance get cut? No word. 

So much for clarity, transparency and predictability.

We have a couple theories.

First, it’s possible the WCB simply ran out of time to evaluate all the thoughtful feedback provided by the public. After all, considering this was the first time public feedback had to be incorporated into the revision process, the WCB was on a fairly tight schedule. The comment deadline was January 11, providing the WCB a little over a month-and-a-half to consider the feedback and incorporate it (or at least any worthy elements of it) into the final revised 499-A and instructions by early March. (Of course, this still means that filers are left with less than a month to digest the final changes, implement modifications to reporting methodology, and prepare the 499-A to be filed by April 1 to avoid – say it with us – potential penalties.) The time constraints would’ve been even greater if certain revisions necessitated Office of Management and Budget approval pursuant to the Paperwork Reduction Act.

Another theory is that the WCB did not include the proposed revisions because soon the guidance provided in the Clarification Order may not be any good. In addition to the feedback in response to the 499-A revisions, a couple of parties of have also filed petitions for reconsideration (see here, and here) of the Clarification Order. It’s possible these petitions could result in further modifications to wholesaler-reseller USF obligations, prompting the WCB to wait. 

Then there’s also the idea, perhaps a little far-fetched, that the proposed revisions would be completely irrelevant because the FCC will soon reform the entire USF contribution program as a result of a proceeding (re)initiated last year.

Whatever the actual reason may be, you’ll have to wait a little longer before getting absolute (is that possible?) clarity, transparency and predictability on the wholesaler-reseller USF issues in question.

In the meantime, take a look at the WCB’s Public Notice summarizing the final changes to this year’s 499-A and instructions. There are no April Fools’ jokes in the Public Notice, but there are some other changes that should be reviewed by those who need to file the Form 499-A by April 1.