FCC Reverses USAC in Two USF Contribution Appeals

In two orders released on June 23, the Wireline Competition Bureau of the FCC granted USF appeals addressing two issue that are quite common in connection with Universal Service Fund contributions. In the first, the FCC granted -- after 13 years -- appeals from resellers that argued their underlying carrier was responsible for reporting the revenue in question. The FCC's reasoning helps to clarify the line between a telecommunications reseller (which is responsible for USF contributions) and a sales agent or marketing agent (which is not). This is the first time the Bureau has delved into this issue outside of the USF orders themselves.

In the second order, the Bureau continued a policy it adopted in 2013, granting waivers for inadvertent administrative errors in USF reporting that have significant adverse consequences. After years of rejecting such appeals, the Commission seems to have accepted what we argued all along: that such errors are inevitable, and fairness requires a more understanding approach to resolving them. We hope that the Commission soon will give USAC guidelines it can apply in granting such waivers, so that appeals to the Commission become unnecessary.

American Cyber Corp. In American Cyber, the Bureau granted a petition for reconsideration filed by several resellers of a 2007 Bureau order which had denied the petitioners' USF appeal (more precisely, it denied an application for review of a 2003 denial of the appeal). The case dates back to 2001 -- 13 years. It involves five companies that were described as "resellers" of another carrier, QAI, Inc. These "resellers" alleged that QAI was obligated to report USF-assessable revenues and to pay USF contributions for the services in question. USAC initially rejected this view, and the FCC affirmed. The FCC's 2007 order stressed that the USF obligation applied to each entity and that an entity may not "contract away" is USF obligations. (The 2007 order held that if QAI breached a duty to report USF, the parties could pursue QAI in a separate action.)

On reconsideration, the Bureau took a different view of the facts of the case. In what the Bureau described as "further consideration of the record," it concluded that the petitioners were not resellers after all. Instead, it concluded that the entities operated as marketing agents for a telecommunications carrier. The Bureau based this conclusion on four key facts:

  1. petitioners were hired to market telecommunications services "on behalf of QAI,"
  2. QAI "had control of" the customers and the telecommunications products being sold (setting prices and determining the underlying telecommunications provider, for example),
  3. QAI billed and collected the revenues, paying petitioners a "commission" or a "margin" on the services, and
  4. petitioners were prohibited from marketing services of other carriers during the relationship.
The Bureau did not suggest that any of these elements were dispositive. However, the Bureau's analysis follows the traditional analysis for distinguishing a service provider from a sales agent. In this case, QAI set the price of the services and maintained the customer relationship. (Although petitioners performed some customer service functions, the Bureau found that QAI still controlled the relationship.) The Bureau doesn't say whether services were billed in QAI's name, but we suspect that this was the case in these sales.

Thus, the order in the end doesn't address the more common reseller issue -- whether a wholesale carrier has a "reasonable expectation" that its customer is a reseller. Instead, American Cyber will stand as guidance in shaping arrangements where a provider wishes to market the services of another, without taking on the carrier obligations itself.

Peerless Network. In Peerless, the Bureau granted a waiver for a mistake make in connection with the filing of a Form 499-Q revenue worksheet. The Form 499-Q is used to bill contributors for USF contirbutions in the upcoming quarter, so a mistake in the projected revenues causes the filer to face what often is an unusually large USF invoice. For several years, the FCC denied all requests for waiver of the USF invoices, standing firm with its 45-day revision deadline for correcting a Form 499-Q. However, in 2013, in the Ascent Media case, the Bureau reversed course, granting a waiver of the 45-day revision deadline in cases where an administrative error is made and the magnitude of that error would disproportionately penalize the filer.

Not surprisingly, since Ascent Media, other filers have occasionally made administrative reporting errors that had significant consequences. Peerless, for example, "made an inadvertent clerical error" in its May 2013 Form 499-Q that resulted in USF invoices that "greatly exceeded" its contribution obligation for the entire year. Peerless did not recognize the error until it received its USF invoice, at which point it attempted to revise the form and appealed USAC's rejection of the form. As the Bureau found in Ascent Media, the Bureau concluded that strict enforcement of the 45-day deadline would disproportionately penalize Peerless, and based on the record, granted a waiver of the revision deadline. USAC was instructed to accept Peerless' revised Form 499-Q as if it were timely filed and to process it accordingly.

For future filers, a few things are noteworthy. First, the type of error that the Bureau has found meritorious of a waiver involves an understandable clerical or administrative error. These typically involve mistakenly reporting all company revenue, not just telecommunications revenue (as in Ascent Media), transposing numbers in a filing, or mistakenly adding a digit to the filing. We do not expect the Bureau to find persuasive "errors" that involved the reclassification of revenue as non-telecom, or modifying the jurisdictional allocation of revenues. Those types of errors can be corrected in the Form 499-A as needed.

Moreover, so far, the Bureau's waivers have applied to mistakes made in the filing of a Form 499-Q. The Commission has before it an appeal that involves a clerical error made in revising a Form 499-A. We believe the considerations in that case are similar. We are awaiting the Commission's action on the appeal.

Finally, the FCC does not yet have a process for USAC to accept these filings. Therefore, the filer must continue to submit a revised form, and expect USAC to reject it. The filer then would be able to appeal the matter to the FCC and plead its case for a waiver. This means that the filer will have a period of at least many months before a decision is made on the error. Filers should be prepared to pay the disputed amount or otherwise address the unpaid USF invoice pending the appeal. In some cases, it may be more expeditious for the filer to correct the error in the Form 499-A than to pursue a waiver.