Our firm prepared the following Advisory to update clients about ongoing Universal Service Fund ("USF" or "Fund") reporting and contribution obligations.  As most clients are already aware, the Federal Communications Commission's ("FCC" or "Commission") rules mandate that all interstate telecommunications service providers ("ITSPs") must contribute directly to the Federal USF if their annual interstate and international telecommunications revenue exceeds $10,000.00.  ITSPs with revenue under the $10,000.00 threshold are considered de minimis and are not required to contribute directly to the USF (but will pay USF pass-through amounts to underlying carriers).

Calculation of whether an ITSP meets the de minimis requirement is complicated by the quarterly contribution schedule adopted by the Universal Service Administrative Company ("USAC").  Under the current Federal USF contribution methodology, all ITSPs must evaluate their contribution obligations on a quarterly basis.  Non-de minimis filers must file the FCC Form 499-Q ("Form 499-Q" or "499-Q") and contribute directly to the USF.  Filers who qualify for de minimis status are not required to contribute directly to the USF or file 499-Qs (however, under the FCC's rules, they must execute a de minimis worksheet and retain this as proof of indirect contributor status for three (3) years in the event of an audit, see: http://www.fcc.gov/wcb/filing.html, at: FCC Form 499-Q Telecommunications Reporting Worksheet).

This reporting methodology may seem straightforward at first.  However, it can be extremely difficult, if not impossible, to accurately determine whether a filer meets the FCC's de minimis threshold throughout the year, because the FCC's USF contribution factors are not known in advance, and because USAC estimates contribution based on a variety of factors.

Actual Contribution Based on USF factors Unknown at the Time of Filing

Under the current USF methodology, USF contribution is based on "projected" revenue for the upcoming quarter (Line 420 (d) and (e) of FCC Form499-Q, not actual revenue for the preceding quarter).  For example, in the 499-Q due May 1st, filers report actual revenue for the first quarter ("Q1") (i.e. January 1st through March 31st) and projected revenue for the third quarter ("Q3") (i.e. July 1st through September 30th).  The filer's contribution is based on its projected revenue for Q3.

However, the actual USF factor is unknown at the time of filing, because the FCC sets the USF factor for the projected quarter two or three weeks in advance of the start of the upcoming quarter.  In other words, USAC does not determine the actual Fund contribution factor for the next quarter until shortly before the close of the current quarter and well after filers have submitted their 499-Qs.  (In the above example, the newly announced Fund contribution factor would apply to the third quarter, i.e., period of . July 1st through September 30th.) 

USAC then issues invoices to 499-Q filers on or around the 15th of the next month using the new contribution factor and based on the projected revenue reported.  Because the actual contribution factor is released after a filer submits its 499-Q, this creates a dilemma for many filers.

De Minimis Worksheet not Used by USAC to Determine De Minimis Status

Filers who believe that they may qualify for the Commission's de minimis exemption, and therefore not need to file 499-Qs, complete a de minimis worksheet each quarter to determine whether they meet the criteria for de minimis status.  Because, as noted above, the actual contribution factor is released after a filer submits its 499-Q, USAC provides an estimated contribution factor for filers to calculate their potential USF contribution. 

Unfortunately, it appears that USAC does not use the estimated contribution factor for any of its own calculations.  According to USAC staff, the estimated contribution factor is provided along with the de minimis worksheet merely as a courtesy for filers to "estimate" their contribution obligations and is not intended to reflect actual contribution obligations.

If an issue or dispute arises regarding reporting or contribution obligations, instead of the estimated contribution factor, USAC uses the actual contribution factor, which is released several weeks after the submission of 499-Qs in question, to determine de minimis status.  Because filers do not know the applicable contribution factor at the time of filing the 499-Q, any de minimis calculations based on the estimated contribution factor will be rough estimates instead of specific amounts and will not be recognized by USAC in the event of a dispute.  Thus, despite the fact that the FCC's rules require filers to retain their de minimis worksheets to assist with audits, USAC will not rely on them should some issue arise.

USAC Estimations of Projected Revenue

In addition to the quarterly 499-Qs, all ITSPs -- regardless of whether they qualify for de minimis status or not -- must annually submit a FCC Form 499-A ("499-A").  The 499-A represents a true-up system to ensure that projected payments coincide with actual revenue.  On the 499-A, a filer reports all actual revenue from the previous year.  USAC matches this against the contributions made on projected revenue.  If a filer has under-contributed, USAC issues a bill for the difference.  If a filer has over-paid, USAC issues a credit.  Every November, USAC releases actual refunds, so any credits left in an account can be transferred back to the ITSP's bank account.

If USAC does not receive Annual and Quarterly Telecommunications Reporting Worksheets (i.e., FCC Form 499-A and FCC Form 499-Q) from an ITSP, it will estimate revenue for the ITSP.  FCC rules require USAC to estimate revenue for all active companies that fail to file Forms 499-A and 499-Q.  To do so, USAC's administrators will use estimated revenue to assess fees and obligations in the same manner as data filed on actual forms.

In addition, similar to the situation noted above regarding reporting and contribution disputes, instead of the estimated contribution factor, USAC uses the actual contribution factors to produce these end-of-year estimations.  Once again, because the actual contribution factor is not available at the time of filing the 499-Q and determination of de minimis status using the de minimis worksheets, USAC's end-of-year estimations could differ greatly from any de minimis calculations made by an ITSP during the year.  This means that a filer can be considered de minimis for its FCC Form 499-A, but still be "estimated" as a direct contributor throughout the year based on actual fee factors. 

USAC will notify companies for whom an estimate will result in change in status from de minimis to non-de minimis status.  This may provide a company with the opportunity to file its own information and allow the company to correct any over-estimation of contribution obligations by USAC.  However, if a company is forced to file a revenue reporting form after USAC has generated an estimate, that filed form will be treated as a revision and may be rejected if the revision window has closed (i.e. one-year for the FCC Form 499-A and 45-days for the FCC Form 499-Q).

CLIENT ADVISORY

USAC's policy leaves many filers in an unfortunate predicament.  Filers who decide not to submit a 499-Q based on de minimis status could be left with no way to defend their decision, because USAC will not recognize calculations based on the de minimis worksheet.  As a result, we recommend the following courses of action:

• We encourage all de minimis clients to evaluate their filing obligations every quarter to ensure that they will not qualify as a direct contributor for the year
• All clients who report non-de minimis on FCC Form 499-A should file FCC Form 499-Qs throughout the year, even if revenue is projected as de minimis for a particular quarter.
• Since the actual contribution factor cannot be accurately determined in advance, clients who have projected revenue close to the FCC's de minimis threshold should contact the firm to evaluate their FCC Form 499 filing obligations.

Clients who need ongoing assistance with FCC Form 499 filing may subscribe to the firm's Compliance and Reporting Services ("C&R Services").  Through these services, the firm's Commpliance Division can handle all ongoing regulatory compliance obligations, including FCC Form 499, CPNI, PIU certification, International Traffic Reports, and related filings, on a low cost, fixed-fee basis.  For more information about C&R Services, please contact Chris Canter at cac@commlawgroup.com.