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The Only Certainties in Life: Death, Taxes and the Universal Service Fund!
By Jonathan Marashlian |
Well, folks, after surviving another long year in the trenches of the prepaid telecommunications industry’s competitive battlefields, the new year is finally upon us. But before you bid farewell to 2005 and close the accounting books for good, there’s someone you mustn’t forget come April – that’s right, Uncle Sam!
And no, I’m not referring to the Internal Revenue Service (“IRS”) and, technically, I’m not even referring to “taxes” and corporate tax returns (though you certainly mustn’t forget about these niceties, either). Instead, I’m referring to the Federal Communications Commission (“FCC”), the Universal Service Fund (“USF”) and other federal programs, and the FCC’s counterpart to the IRS’s Form 1120 – the one and only FCC Form 499-A Telecommunications Reporting Worksheet (“Form 499-A”).
What is Form 499-A?
Section 254(d) of the federal Telecommunications Act requires the FCC to collect USF contributions from all telecommunications providers offering interstate and international telecommunications services (including providers of prepaid calling cards and wireless services). The FCC delegated authority over the administration of the USF program, including data collection, invoicing and the distribution of contributed funds to the Universal Service Administrative Corporation (“USAC”). Either directly or through delegated authority to the likes of NECA, Neustar and Welch & Company, the FCC also oversees a handful of other federal regulatory programs, including the Telecommunications Relay Services (“TRS”) fund, North American Numbering Plan (“NANP”), Local Number Portability (“LNP”) and the FCC’s annual regulatory fee (collectively, “FCC Programs”). All of the FCC Programs share one thing in common – Form 499-A. Form 499-A is critical to the administration, functioning and enforcement of these FCC Programs, much like tax returns are critical to the IRS.
Providers of interstate telecommunications services are required to complete and submit Form 499-A to register with the FCC prior to offering interstate telecommunications services. At the time of initial registration, providers are not required to supply revenue information. However, on April 1st of each year following registration (just over two months from today), providers must submit Form 499-A, complete with detailed annual revenue information from the prior calendar year. A reporting entity’s annual revenue must be broken down and reported in various service and jurisdictional categories, all of which are specified in Form 499-A. Over the past several years, however, the process of properly categorizing and reporting revenue has become increasingly difficult, for reasons explained below. As a side note, providers that do not qualify as de minimis under FCC regulations must also file Form 499-Q each quarter in February, May, August and November. For purposes of this article, however, we will focus on Form 499-A, and the upcoming April 1st annual filing.
Most readers would agree that today’s regulatory environment is murky and uncertain, at best. With the explosion of wireless communications, IP-based and hybrid services (which combine enhanced services with traditional telecommunications), not to mention prepaid and bundled service offerings, the FCC’s regulations have not always kept pace -- which is perhaps the understatement of the new millennium! How, you ask, does the unclear regulatory environment relate to Form 499-A?
Form 499-A reporting is inextricably linked to regulatory and jurisdictional classifications; you can’t do the former without knowing how to do the latter. Form 499-A requires reporting entities to segregate revenue into a variety of “boxes.” For example, prepaid revenue is separated from postpaid, interstate is separated from international, enhanced is separated from telecommunications, wholesale is separated from retail, and so on. The ultimate goal of the Form 499-A is to report revenue subject to FCC jurisdiction according to certain rules and in such a manner so as to enable the FCC and various administrators of the FCC Programs to determine a reporting entity’s USF, TRS, NANP and LNP charges and annual regulatory fees.
In this day and age of regulatory uncertainty, however, it has become increasingly difficult for the average business person to accurately and competently complete Form 499-A. Even the savviest business owner teamed with an otherwise knowledgeable accountant can unwittingly over report, under report or mistakenly report revenue. Such mistakes can hurt the bottom line because they can result in excessive contributions to the FCC Programs, or worse, underpayments which could trigger the FCC’s enforcement authority.
At the very least, be sure you identify whether your company is required to file, and if so, be sure you file your Form 499-A on or before April 1, 2006. Filing a Form 499-A is not unlike filing an income tax return with the IRS; even the consequences of non-filing are similarly harsh.
As of September 2004, the Telecom Act authorizes forfeitures of up to $130,000 for each violation or each day of continuing violation, with a statutory maximum of $1.325 million. In addition to monetary forfeitures, providers failing to file Form 499-A and/or make required USF, TRS, NANP, LNP and regulatory fee contributions and payments can be subject to more serious enforcement actions.
To GAAP or not to GAAP? That is the question
This segment is dedicated to the prepaid calling card provider, as it contains observations regarding Form 499-A reporting that are specific to entities operating in this space. The purpose is to provide thought provoking information regarding what appears to be a conflict between FCC regulations and Generally Accepted Accounting Principles (“GAAP”).
According to Form 499-A and the instructions thereto (which are tantamount to FCC regulations and have been enforced as such in the past), reporting entities are required to report revenue derived from prepaid calling cards (including card sales to customers and non-carrier distributors) based on the “face value” of the cards. In other words, reporting entities are expected to report prepaid calling card revenue based on the “retail” price of the product as sold to the ultimate consumer, regardless of how much revenue the provider actually booked from the transaction. Compliance with this regulation creates an unfair and unbalanced competitive environment, as explained below.
Compared to non-prepaid telecommunications service providers, wherein sales are predominantly directly between the provider and end user, the prepaid industry operates under a materially different business model. The vast majority of prepaid card sales require at least a two-step transaction – Step 1. Carrier sells cards to Distributor at discount. Step 2 - Distributor sells cards to retailers and/or the public.
In practice, the prepaid business model requires calling card providers to sell their calling cards to distributors at varying discounts off “face value.” Application of FCC regulations requiring prepaids to report “face value” in their Form 499-A means that prepaid providers ultimately pay far higher USF contributions than their postpaid counterparts.
For example, if a prepaid provider sold service at a 40 percent discount to a distributor and is required to make USF contributions based on the “face value” of the card, the prepaid provider’s USF contribution bill would be 67 percent higher than the rate imposed on non-prepaid carriers.
Stated differently: If a non-prepaid carrier sells $1 million of interstate service to consumers, at the current 10.2 percent USF factor, the carrier’s full year USF contribution bill will be $102,000. However, if a prepaid phone card (or prepaid wireless) carrier sells $1 million “face value” of phone cards for $600,000 (based on a 40 percent distributor discount), the USF bill is still $102,000, an effective rate of 17%.
So, you ask, what is your thought-provoking observation?
Disclaiming all but primitive knowledge of GAAP, which is the predominant accounting methodology utilized in the business world today, there is seemingly an inextricable conflict between GAAP accounting rules and FCC Form 499-A regulations pertaining to the reporting of prepaid calling card revenue. Now, no one likes a cliffhanger, but the astute reader will know my reasons for stopping here. Suffice it to say that reaching a satisfactory resolution of the seeming conflict should be an important consideration for any prepaid calling card provider when sitting down to prepare your Form 499-A.
Conclusion
Preparing your Form 499-A is tricky business and is full of regulatory nuances, potential pitfalls and challenging decisions. You have a little over two months before the April 1st filing deadline. Whether you are an old pro or new to the prepaid business, this is one aspect of running your business you are well-advised to not attempt without professional assistance.
Disclaimer: None of the information contained in this article should be construed as legal advice. If you need legal advice regarding any of the matters addressed in the article, please seek the assistance of legal counsel.
Jonathan S. Marashlian is partner at The Helein Law Group, a Washington, D.C.-area law
firm specializing in federal and state telecommunications and technology matters.
He can be reached at jsm@thlglaw.com.
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