Written by attorney Jonathan Soukias Marashlian

FCC USF Exemption Process: Carrier's Carrier Rule Compliance

A. Wholesale Revenue Reporting In FCC Forms 499-A and 499-Q, Annual and Quarterly Telecommunications Reporting Worksheets ("Form 499"), regulated telecommunications carriers must report revenues using two broad categories: (1) Revenues from contributors to the federal universal service support mechanisms; and (2) Revenues from all other sources. Together, these revenues must include all revenues billed to customers and all revenues on the reporting entities' books of account.

  1. What is "wholesale" telecommunications revenue? For the purposes of Form 499:

'Revenues from services provided for resale by other contributors to federal universal service support mechanisms' are revenues from services provided by underlying carriers to other entities that currently are contributors to universal service support mechanisms and that are resold in the form of telecommunications. Such revenues are referred to herein as 'carrier's carrier revenues'" or 'revenues from resellers.'

A "reseller" is a telecommunications carrier, telecommunications services provider or interconnected VoIP services provider that:

(1) incorporates purchased telecommunications services into its own telecommunications offerings; and (2) can reasonably be expected to contribute to federal universal service support mechanisms based on revenues from such offerings when provided to end users. Reselling carriers can also sell services to another reseller. In these instances, a wholesale carrier may include as carrier's carrier revenue any revenues received from services provided to a reseller who certifies to the wholesale carrier that:

a. All of the reseller's customers are themselves FCC Form 499-A worksheet filers; and b. All of the reseller's customers are direct contributors to universal service support mechanisms.

"Revenues from all other sources consist primarily of revenues from services provided to end users, referred to [in FCC Form 499-A] as 'end-user revenues.' This latter category includes foreign non-telecommunications revenues."

  1. How is "wholesale telecommunications revenue" reported in Form 499?

For revenue reporting purposes, Form 499-A is divided into the two broad categories described above: 1) "Carrier's carrier" revenue; and 2) "End user" and non-telecommunications revenue; or in simpler terms, WHOLESALE and RETAIL. Filers report wholesale revenue in Block 3 of Form 499-A, and retail revenue in Block 4.

Wholesale telecommunications revenue, verified pursuant to the processes described below, should be recorded as wholesale revenue in a carrier's books and reported in Line 315 of Form 499-A. A carrier must break out wholesale telecommunications revenue by jurisdiction unless it provides services qualifying for a safe harbor allocation method (such as cellular, bundled services or interconnected VoIP). When allocating wholesale telecommunications revenues by jurisdiction, a carrier may:

1) Book Amounts (actual usage-based allocation)

a. Reported in Line 315 as follows: i. 315(a) - total wholesale revenue = intrastate + interstate + international ii. 315(d) - interstate wholesale iii. 315(e) - international wholesale

2) Good faith estimates (supported by a traffic study) if the carrier provides qualifying services:

a. Reported in Line 315 as follows: i. 315(a) - total wholesale revenue = intrastate + interstate + international ii. 315(b) - interstate wholesale iii. 315(c) - international wholesale

Valid wholesale revenue reported in Block 3 of Form 499-A is not part of the FCC Program's contribution base and, therefore, will not result in FCC charges. Validating wholesale revenue requires compliance with the procedures described in the next section.

B. Wholesale Customer/Revenue Validation Requirements & Process

FCC rules require carriers in their capacity as wholesale service providers (carriers providing telecommunications services for resale or for sale as telecommunications), to have documented procedures to ensure that the company reports as "revenues from resellers" only revenues from entities that reasonably would be expected to contribute to universal service. These internal procedures should include, but not be limited to, maintaining the following information on resellers:

o Filer 499 ID (a 6-digit number assigned to entities that register as Interstate Telecommunications Service Providers with USAC) o Legal name and address of reseller customer o Name and phone number of a contact person for the reseller customer; o Evidence of the filer's use of the FCC's website to validate the contributor status of the reseller (Filers must visit to verify the contribution status of a reseller customer) o Signed annual certification by the reseller containing the following language:

I certify under penalty of perjury that the company is purchasing service for resale in the form of U.S. telecommunications or interconnected Voice over Internet Protocol service. I also certify under penalty of perjury that either the company contributes directly to the federal universal support mechanisms, or that each entity to which the company provides resold telecommunications is itself an FCC Form 499 worksheet filer and a direct contributor to the federal universal service support mechanisms.

Carriers must maintain information and documents supporting their designation of a customer as a "reseller" and must provide this information to the Commission or USAC upon request.

  1. Use of Annual USF Exemption Certification ("Exemption Certificate") To satisfy all but the last of USAC's requirements listed above, a carrier could adopt a USF Exemption Certificate. Upon adoption, the carrier would require all reseller customers to complete the Exemption Certificate prior to initiating service and annually thereafter. The CommLaw Group has extensive experience in crafting tailored exemption certifications for wholesale service provides, and can assist your company with the certificate and accompanying supportive documentation for compliance with the Carrier's Carrier Rule.

  2. Contributor Status Validation Requirements In addition to securing and maintaining the information listed above through the USF Exemption Certificate process, carriers must take the additional step of validating the statements and certifications of its reseller customers.

To facilitate verification of a reseller's certification, current contributors to universal service mechanisms are identified on the FCC's Form 499-A Search Form, located at:

A wholesale carrier must use this website to verify the validity of a reseller customer's certification prior to initiating service and on a continuing basis. Carriers may presume that any reseller identified as a contributor on the FCC's website a month prior to an FCC Form 499-Q filing will be a contributor for the upcoming quarter, and that the reseller was a contributor for all prior quarters during that calendar year.

If a carrier fails to comply with the above procedures, it will be responsible for any additional universal service assessments that may result if any customers must be reclassified as end users.

  1. Implications & Consequences of Non-Compliance Implementing an Exemption Certification and validation process can be used to justify reductions to a carrier's USF contribution liability. Accurately accounting for and differentiating revenue between reseller customers and end-user revenue will ensure that the carrier only reports, and is only liable for, USF and related FCC Program contributions based on "retail" telecommunications revenue.

Direct revenue from end-user customers is included in a wholesale provider's USF contribution base, and the wholesaler pays USF on such amounts. Therefore, the more revenue generated from end-user customers, the higher the underlying wholesale provider's USF liability. On the other hand, revenue from reseller customers is generally excluded from the wholesale provider's USF contribution base because its reseller customers already make USF payments to USAC directly. Thus, a carrier's proper categorization of reseller customers can reduce the underlying provider's USF liability by ensuring that the wholesaler only pays USF on end-user revenues.

Compliance with the Exemption Certificate and validation process can also help wholesale providers determine which customers are "de minimis." Revenues from entities that are "de minimis" are treated like revenues from end users and included in the wholesale provider's own USF contribution base. However, the wholesale provider may exclude such revenues for purposes of calculating contributions to the Telecommunications Relay Service Fund ("TRS"), Local Number Portability Administration ("LNPA") and North American Numbering Plan Administration ("NANP").

Lastly, underlying wholesale carriers must adhere to the procedures described above before providing service to any resellers, otherwise they may be: 1) held vicariously liable for the unpaid or underpaid USF contributions of their customers; and 2) subjected to audit, investigation, and possibly FCC fines, which could be imposed for failure to comply with FCC rules.

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