FCC Clarifies Reseller Certification Process for Universal Service Fund Contributions

Kelley Drye Client Advisory

Wholesale Carriers Given Until January 2014 to Implement Service-specific Certification Procedures

The Federal Communications Commission (“FCC” or Commission”) has been considering comprehensive reform of its contribution mechanism for universal service fund assessments since April. In addition, however, the FCC has before it numerous contributor appeals of audit decisions by the Universal Service Administrative Company (“USAC”) and several USAC requests for guidance on universal service fund (“USF”) issues. Many of those appeals and requests for guidance involve the questions about when a wholesale carrier may classify revenues obtained from other carriers as reseller revenues. On November 5, 2012, the FCC released an order ruling on several of these reseller issues. The Commission described its Order as providing much-needed clarification for contributors on existing USF contribution obligations and administrative requirements for the contribution system.”

The Order will benefit wholesale carriers by making it easier in some instances to demonstrate that a customer qualifies as a reseller responsible for its own USF contributions. However, both wholesale carriers and resellers will need to implement new procedures to identify exempt and non-exempt services sold to a particular entity, even where the reseller qualifies on some services it purchases. These procedures must be in place by the beginning of 2014. Moreover, for resellers purchasing wholesale telecommunications inputs to provide stand-alone Internet access services (and no other service), the Order, when fully implemented, will lead to increased wholesale costs.

Reseller Rules Clarified

The most significant aspects of the FCC’s Order address the standard to be applied by a wholesale carrier when classifying its revenues as reseller revenues. The FCC affirmed the long-standing definition of a reseller” used in the Form 499-A Instructions, but emphasized an interpretation that differs from that commonly applied in the industry. In addition, the FCC reversed USAC’s practice of looking only to whether a wholesale carrier followed the reseller certification procedures described in the Form 499-A Instructions, and directed USAC to consider other reliable proof” that may differ from the Instructions under a totality of the circumstances test. Third, the FCC clarified that, even if the wholesale carrier cannot demonstrate that it properly verified the reseller’s status, USAC may not double recover USF contributions if the reseller in fact contributed to the USF on the revenues.

Specifically, with respect to the definition of a reseller, the FCC concluded that in order to be a reseller” the carrier customer must both (1) incorporate the purchased telecommunications services into its own service offerings and (2) be reasonably expected to contribute to the USF based on revenues from those offerings. The Commission’s clarification, however, emphasizes that both elements must separately and independently be established and – most significantly – that the wholesale carrier must determine that its customer contributes to the Fund on revenues derived from the purchased wholesale services, not just on its revenues, generally.

This service-specific approach is more rigorous than has typically been applied by wholesale carriers, many of whom confirmed that the customer contributed to the Fund based on its offerings as a whole, but without visibility into the specific end user services. As a result, both wholesale carriers and resellers will be required to implement new procedures in order to identify the end user services for which particular wholesale inputs are used and, ultimately, to determine exempt and non-exempt services purchased by the reseller.

Second, the FCC clarified the process USAC must follow to examine a wholesale carrier’s decision to exempt a reseller from USF charges. The Order does this in two parts. First, it clarified the evidence that may be used to demonstrate an reasonable expectation” that the reseller is contributing to the Fund. In this respect, the Order concludes that compliance with the certification process in the 499-A Instructions is a safe harbor for classifying resellers, but that USAC is obligated to consider evidence other than that listed in the 499-A Instructions as other reliable proof” supporting classification of an entity as a reseller. This direction is a significant change from prior USAC procedure, where many wholesale carriers contended that USAC applied the Form 499-A Instructions as rules and failed to consider additional evidence.

Now, USAC will be required to consider other evidence that does not strictly meet the procedures contained in the Instructions. In particular, the Order rules that USAC must consider outdated” certifications – certifications signed prior to the audited year – and consider the weight to be given to the prior certifications based on the totality of the circumstances. In addition, we expect that indirect evidence of contributions will now be considered by USAC in an audit context, making it easier for a wholesale carrier to justify its reseller classifications.

Furthermore, the Order addressed the situation where the wholesale carrier cannot demonstrate a reasonable expectation” at the time of service that the reseller would contribute. Specifically, in response to a USAC guidance request, the FCC ruled that, even if the wholesale carrier is unable to demonstrate a reasonable expectation at the time it provided services, USAC may not knowingly collect USF contributions from the wholesale carrier if the wholesale provider’s customer actually contributed on the subject revenues. Thus, USAC may not double-collect USF contributions if it can be established that the reseller actually contributed to the Fund. The Order places a heavy burden on the wholesale carrier in this instance; it must demonstrate through clear and convincing evidence” that actual contributions were made by the reseller based on the relevant services. The Order directed USAC to consider any evidence presented to demonstrate actual contributions, including confirmatory certifications executed by the reseller after the services were provided. USAC, however, is not required to conduct its own investigation of the resellers. Instead, the wholesale carrier bears the burden of demonstrating actual contributions.

In sum, under the Order, a wholesale carrier may avoid USF contributions on services sold to resellers either by (a) demonstrating it had a reasonable expectation” the reseller would contribute, which can be shown either through the procedures in the Instructions or through other reliable proof”; or (b) demonstrating through clear and convincing evidence that the reseller actually contributed to the USF on the relevant services purchased from the wholesale carrier.

New Reseller Certification Procedures Must Be Implemented

As noted above, the Order presents an interpretation of the reseller qualification procedures that was not universally understood by the industry. Specifically, under the Order, wholesale carriers will have to demonstrate that its resellers are contributing to the USF on the services purchased from the wholesale carrier. This service-specific approach differs from the entity-wide certifications generally used by wholesale carriers and resellers today.

Recognizing this industry practice, the Commission gave the industry until January 2014 to implement the service-specific requirement. Until then, wholesale carriers may continue to rely on certifications that contain the sample certificate language in the 2012 Form 499-A Instructions in order to demonstrate a reasonable expectation” that the reseller will contribute. The Order is not clear on what level of proof would be sufficient during this transition period for wholesale carriers that use methods to qualify resellers that differ from the safe harbor in the Instructions, however.

Most significantly, the new service-specific certification procedures are likely to result in some resellers paying USF contributions on a portion of their wholesale inputs. Where a reseller purchases a telecommunications input to be used solely to provide a non-assessable end user service, the Order would not permit the wholesale carrier to classify the customer as a reseller. This aspect will have primary significance for resellers that purchase inputs in order to provide an Internet access service, but only if the reseller does not also provide an assessable service in addition to the Internet access. Services that are resold purely as non-telecommunications would not qualify once the service-specific exemption process is implemented. Services that are resold in a mix of assessable and non-assessable services would still qualify for exemption.

Both wholesale carriers and resellers should examine the Order carefully in order to implement revised certification procedures by the January 2014 deadline.