Compliance with Clarified FCC Rules Governing Wholesaler-Reseller Exemption from USF - Part 1
On November 5, 2012, the Federal Communications Commission (“FCC" or “Commission") released an Order clarifying wholesalers’ responsibilities to verify the Universal Service Fund (“USF") contributions of their reseller customers under the Carrier’s Carrier Rule (“CCR"). The CCR requires a wholesale provider to treat the revenues of a reseller customer as USF assessable end-user revenues, unless the wholesaler reasonably expects that the reseller contributes directly to the Fund. The FCC clarified that under the CCR, to classify revenues from wholesale services as carrier’s carrier revenues exempt from USF contributions, the wholesale provider must either have “affirmative knowledge" or a “reasonable expectation" that its customer is itself contributing to the Fund on revenues derived from those purchased wholesale services. 
In the Order, the FCC has taken steps not only to clarify but to reinforce the CCR with the clear goal of reducing gaming of the system and inequitable consequences for wholesalers who rely on reseller exemptions.  The Order specifically responds to a pending request for guidance from the Universal Service Administrative Company (“USAC") as well as requests for review of Wireline Competition Bureau (“Bureau") and USAC decisions involving the USF contribution obligations of certain wholesalers and their reseller customers. This Memorandum discusses the measures adopted by the FCC in its Order and the impact of the decision on the reseller certification process.
I. Definition of “Reseller"
The FCC first confirmed that to qualify as a “reseller," an entity must both (1) incorporate purchased telecommunications into its own service offerings; and (2) reasonably be expected to contribute to the Fund based on revenues from those offerings.  The Commission expressly rejects Global Crossing’s contention that qualification as a reseller should turn exclusively on the functional nature of the service provided by the wholesaler and instead concludes that an entity qualifies as a reseller for USF purposes only if it meets both of these two prongs.  In other words, by default, the FCC classifies an “end user" as any entity that does not contribute directly to the Fund. Essentially, the Commission concludes that resellers may qualify as end users, despite the fact that they do not use the services sold and in fact resell them, if they do not contribute directly to the USF.
In addition, for the first time, the FCC suggests a “service specific" exemption. While it does not specifically adopt a service by service exemption process, the Commission concludes: We do not read the existing definition of “reseller" so broadly that it would enable a company to certify it is a reseller if it contributes on any of its product offerings that may incorporate wholesale inputs. 
As the system currently stands, if a reseller appears as a direct contributor to the USF, it will be exempt from all pass-through fees on any inputs purchased from the wholesale provider. The wholesale provider is not required to verify that the reseller incorporated that input into a finished service and contributed to the USF on that service. The language the FCC adopts, however, suggests that the Commission may be moving in the direction of a “service-specific" exemption, where a reseller may be subject to USF contributions on some of the services that it resells using the wholesaler’s inputs, but exempt with respect to other services.
II. The Reasonable Expectation Standard and “Other Reliable Proof"
Second, the Commission clarified how wholesalers can meet the “reasonable expectation" standard. For the first time, the FCC adopted the Bureau’s “other reliable proof" standard articulated in a 2009 Bureau Order.  The Commission confirmed that the Form 499-A instructions (“Instructions") constitute a “safe harbor," compliance with which meets the reasonable expectation standard and will excuse wholesalers from liability for any of the reseller’s USF contribution obligations.  If a wholesaler does not comply with the safe harbor, it can still meet the reasonable expectation standard by submitting “other reliable proof" that it had a reasonable expectation that its reseller customers would contribute directly to the USF. 
The FCC instructed USAC to review other evidence on a case-by-case basis, cautioning that USAC is not required to consider any evidence that does not meet the safe harbor as dispositive.  For the first time, the Commission also adopted a heightened evidentiary standard advising USAC to review evidence submitted as “other reliable proof" to “determine if a filer has presented clear and convincing evidence that it had a reasonable expectation that its customer is itself contributing to the Fund…" 
The Commission identified several examples of evidence that may be considered by USAC under the “other reliable proof" standard. For example, USAC may consider “outdated" certificates (i.e. certificates signed prior to the calendar year in which revenues were collected) or reseller certificates that have wording other than the sample language in the Instructions.  However, the FCC clarified that USAC may not consider “post-dated" exemption certificates, confirming that a filer contributed to the USF in the past because a filer should have a reasonable expectation that a customer will contribute  to the Fund before it classifies revenues as carrier’s carrier revenues. The FCC clarified that the “relevant time period for the ‘reasonable expectation’ analysis is the period during which a wholesale provider collects and submits the revenue data at issue to USAC." 
Although the FCC did not provide any guidance as to how to meet the “affirmative knowledge" standard, it did confirm that to demonstrate “affirmative knowledge" that a reseller customer contributes directly, a provider must also meet the “clear and convincing" evidence standard. 
CONTINUED IN PART 2