FCC Clarifies Reseller Exemption Requirements for USF Contributions

November 06, 2012

On November 5, the FCC released an Order in its USF contribution proceeding that resolves several issues related to wholesale and resale relationships, addressing appeals from XO and Global Crossing Bandwidth, requests for guidance from USAC, and a petition for clarification of the TelePacific Order. All of the proceedings involved standards for classifying revenue as wholesale (exempt from Contribution) or end user (subject to contribution). The Commission (1) “affirmed” that in order to be classified as a “reseller,” a carrier-customer must incorporate telecommunications in to its own service offerings and contribute to the USF based on revenue from those offerings, (2) clarified how USAC should apply the “reasonable expectation” standard and when reclassification of wholesale revenues as end user is appropriate, and (3) permitted wholesale carriers and resale customers to rely on certificates consistent with the sample language in the 2012 Form 499-A instructions through December 31, 2013. The Commission also directed the Wireline Competition Bureau to revise the Form 499-A instructions for 2013 and seek comment on the changes, subject to (3) above.

Since 2007, the Form 499-A instructions have stated wholesale carriers should obtain annual certifications from their resellers. In both the XO and Global Crossing proceedings, USAC auditors reclassified wholesale revenue as end user because the carriers did not have certifications from the applicable time period that met the “reasonable expectation” standard. In resolving this issue, the Commission established a multi-step inquiry. First, USAC should apply the Form instructions for the year in question to determine if the wholesale provider met all of the prongs of the safe harbor (i.e., reseller certification executed within the reporting period, filer ID number, check of FCC website). Second, absent compliance with the safe harbor, the wholesale provider must establish through clear and convincing evidence that it had a reasonable expectation its customer was incorporating the services in the customer’s offerings and contributing to USF on the resold revenue. That evidence can include pre-service certificates and other “reliable proof” not specified in the Form 499 instructions. If the wholesaler complies with the safe harbor or meets the clear and convincing evidence standard, USAC may not reclassify the revenue as end user. Third, if the wholesaler does not satisfy the safe harbor or clear and convincing evidence standard, USAC should determine if the customer actually contributed to USF by reviewing its records and evidence from the wholesaler, including confirmatory certificates. If the customer has in fact contributed to USF, USAC may not reclassify the wholesale revenue as end user revenue. A wholesale provider that does not establish a reasonable expectation at the time it signs its Form 499 has not met its due diligence obligations.

The Order acknowledges that carriers have relied on the sample certification language and verification procedure in the instructions, and this may have led to instances in which neither the wholesale nor resale provider contributed to USF for certain interstate services. The Commission does not read the definition of “reseller” broadly to enable a customer to certify reseller status if it contributes on any of its product offerings that incorporate wholesale inputs. For example, a customer purchasing a DS1 line and incorporating it in broadband Internet access is not a reseller for purposes of that line. Recognizing that many providers have adopted the sample certification language and incorporated it into their business practices, the Order finds that through December 31, 2013, wholesale providers may establish a reasonable expectation, and resale customers may certify reseller status, consistent with the sample language in the 2012 instructions. (Contributors that do not rely on the sample language must meet the clear and convincing standard.)  The Order does not address services provided over other facilities, such as UNEs or fiber, and notes that if a customer purchases a DS1 line and incorporates it into an offering of both telephone service and broadband Internet access, the customer may certify reseller status for that line so long as it contributes on assessable revenues from telephone service.

Finally, the Order directs the Bureau to issue, within 30 days, a Public Notice seeking comment on any revisions to the 2013 Form 499-A. The Commission also remands to USAC the issue of whether XO or Global Crossing met the reasonable expectation standards (as clarified) and directs USAC to provide Global Crossing detailed findings on which it bases any revenue reclassification and issue new invoices or refunds as appropriate.

If you have questions or would like to discuss this order and its impact on your business, please do not hesitate to call:

Tamar E. Finn +1.202.373.6117

This article was originally published by Bingham McCutchen LLP.