Lower Burden for Wholesalers to Prove Revenue from Resellers

by Dorsey & Whitney LLP
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As a general matter, a wholesale provider may meet the Federal Communications Commission’s (“FCC”) reasonable expectation standard and establish revenue from resellers in one of two ways: (1) follow all of the guidance in the FCC Form 499-A instructions for the relevant contribution year (i.e., avail itself of the applicable “safe harbor”); or (2) present “other reliable proof.”1 A recent change makes it somewhat easier for wholesale telecommunications providers that use the “other reliable proof” standard to corroborate the portion of their revenues that come from resellers. Specifically, on July 25, 2014, the FCC issued the Wholesaler-Reseller Reconsideration Order (the “Order”),2 which overturned the FCC’s previously mandated “clear and convincing” reseller standard in favor of a preponderance of the evidence standard. Using the preponderance of the evidence standard, a wholesale provider can establish a reasonable expectation through “other reliable proof” by showing that it is “more likely than not” that the wholesaler’s reseller customers3 will contribute to the federal Universal Service Fund (“USF”).4

As a practical matter, the change to a preponderance of the evidence standard plays out in one of two ways for wholesale carriers who do not avail themselves of the reseller safe harbor to report reseller revenues on their FCC Forms 499-A:

  1. Demonstrating a reasonable expectation that a reseller customer will contribute to the federal USF: Under the “other reliable proof ” standard, a wholesaler must show that it is more likely than not that during the relevant time period the wholesale provider reasonably expected its reseller customer to contribute to the federal USF on revenues from the services purchased from the wholesaler and incorporated into the reseller’s own telecommunications product.5
  2. Demonstrating that a reseller customer actually contributed to the federal USF: If a wholesale provider cannot establish that it had a reasonable expectation that its reseller customer contributed to the federal USF under the “other reliable proof” standard and seeks to demonstrate that its reseller customer actually contributed to the federal USF, the wholesaler must demonstrate that it is more likely than not that its customer actually contributed to the federal USF on the revenues from the services purchased from the wholesaler and incorporated into the reseller’s own telecommunications product. The evidence of actual contribution provided by the wholesaler will not be sufficient to meet the preponderance of the evidence standard unless the Universal Service Administrative Company’s6 records corroborate that the reseller customer actually contributed to the federal USF during the relevant calendar year.7

Regarding a reseller certificate obtained by a wholesaler after the filing of a relevant FCC Form 499-A, otherwise known as “Confirmatory Certificate,” the FCC determined that while a Confirmatory Certificate may be used to demonstrate that a reseller customer actually contributed to the federal USF, a Confirmatory Certificate, by itself, does not satisfy the preponderance of the evidence standard to demonstrate a reseller customer’s actual contribution to the federal USF, nor does it establish any kind of a safe harbor for actual contribution.8 “A properly drafted Confirmatory Certificate may help support [an actual contribution] finding under the preponderance of the evidence standard, but the evidence submitted must also be corroborated by USAC’s own records regarding the customer’s contribution, and must establish that the contribution was made on the relevant revenues.”9

The Wholesaler-Reseller Reconsideration Order also reaffirmed the following prior determinations made by the FCC in the Wholesaler-Reseller Clarification Order:10

  • A reseller certificate alone does not satisfy the safe harbor. Rather, a wholesale provider must comply with all of the FCC Form 499-A instruction guidance to meet the safe harbor standard.11
  • Even if a wholesale provider fails to establish that it meets the reasonable expectation standard, USAC should not attempt to recover federal USF contributions from the wholesaler if the wholesaler’s reseller customer actually contributed to the federal USF during the relevant period.12
  • When determining whether a wholesaler’s reseller customer has actually contributed to the federal USF, USAC is not required to conduct an independent investigation beyond checking its own records, but should consider all evidence offered by the wholesaler.13
  • If a wholesale provider does not have affirmative knowledge or a reasonable expectation that its reseller customer is contributing to the federal USF on the revenues derived from the telecommunications provided by the wholesaler, the wholesaler must treat the revenues from its reseller customer as end-user (i.e., retail) and include the revenues in the wholesaler’s federal USF contribution base.14

Although the Order technically reduces the level of proof required for wholesalers to corroborate their reseller revenues, both the Order and the FCC’s prior Wholesaler-Reseller Clarification Order lend support to the notion that a wholesale provider’s safest course of action when reporting revenue as reseller on the FCC Forms 499 is to avail itself of the reseller safe harbor option by following all of the reseller guidance set forth in the applicable FCC Forms 499. If a wholesaler follows the reseller safe harbor, it will be deemed to have demonstrated a reasonable expectation that its revenues are reseller.15 However, to the extent that a wholesaler deviates from the FCC Form 499-A safe harbor, USAC is required to evaluate the “other reliable proof” provided by the wholesaler on a case-by-case basis to determine whether a wholesaler had a reasonable expectation that its reseller customer would contribute to the federal USF on revenues derived from the wholesale telecommunications services purchased from the wholesaler.16 “Filers that do not comply with the safe harbor procedures or that do not otherwise meet the reasonable expectation standard will be responsible for any additional [federal] universal service assessments that result if their revenues must be reclassified as end user revenues.”17

The subjectivity inherent in a case-by-case USAC review can lead to the costly reclassification of reseller revenues (i.e., increased federal universal service contribution obligations), as well as protracted USAC and FCC appeals, as evidenced by the procedural history related to this Order alone.18 As illustrated by this client alert, reseller revenue issues are complex. Failure to meet the FCC’s safe harbor, other reliable proof, and reasonable expectation standards can have time consuming and costly implications for wholesalers. If you have a question regarding proving, documenting and/or reporting reseller revenue, Dorsey’s federal universal service experts are available to help.

1   In the Matter of Universal Service Contribution Methodology Petition for Clarification and Partial Reconsideration by XO Communications Services, LLC, WC Docket No. 06-122, Order on Reconsideration, FCC 14-104, ¶ 9 (rel. July 25, 2014) (“Wholesaler-Reseller Reconsideration Order”); In the Matter of Universal Service Contribution Methodology Application for Review of Decision of the Wireline Competition Bureau filed by Global Crossing Bandwidth, Inc. et al., WC Docket No. 06-122, Order, FCC 12-134, ¶ 6 (Nov. 5, 2012) (“Wholesaler-Reseller Clarification Order”).
2   See generally Wholesaler-Reseller Reconsideration Order.
3   A reseller is a telecommunications provider that: 1) incorporates telecommunications services purchased from a wholesaler into the reseller’s own offerings; and 2) can reasonably be expected to contribute to the federal USF on the revenues from those offerings. Wholesaler-Reseller Reconsideration Order, ¶5.
4   Wholesaler-Reseller Reconsideration Order, ¶¶ 2, 12-13.
5   Id. at ¶¶ 2, 12-13.
6   USAC is the not-for-profit corporation designated by the FCC to administer the federal universal service support mechanisms under the direction of the FCC. 47 C.F.R. § 54.701.
7   Wholesaler-Reseller Reconsideration Order, ¶ 14.
8   Id. at ¶ 17.
9   Id. at ¶ 18.
10  See generally Wholesaler-Reseller Clarification Order.
11  Wholesaler-Reseller Reconsideration Order, ¶ 16; Wholesaler-Reseller Clarification Order, ¶¶ 6, 51.
12  Wholesaler-Reseller Reconsideration Order, ¶ 9; Wholesaler-Reseller Clarification Order, ¶¶ 5, 44.
13  Wholesaler-Reseller Reconsideration Order, ¶ 9; Wholesaler-Reseller Clarification Order, ¶¶ 45, 52.
14  Wholesaler-Reseller Reconsideration Order, ¶ 5; Wholesaler-Reseller Clarification Order, ¶¶ 3, 12.
15  See, e.g., Instructions to the Telecommunications Reporting Worksheet, FCC Form 499-A, at 23 (2014) (“2014 FCC Form 499-A Instructions”).
16  Wholesaler-Reseller Reconsideration Order, ¶ 13; Wholesaler-Reseller Clarification Order, ¶¶ 6, 52.
17  2014 FCC Form 499-A Instructions at 23.
18  Wholesaler-Reseller Clarification Order, ¶¶ 7-10.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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