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The Legal Line
By Ed Maldonado |
Dear Ed,
I have recently been doing due diligence on the purchase of a telecommunications company that offers VoIP channels from international points to U.S. destinations. Our goal is to acquire a functioning company that can resell VoIP services to African and European telecom companies, which will then resell those services to consumers outside the U.S. During my due diligence research, the greatest risk seems to be on USF (Universal Service Fund) liabilities. I have read up on this and while it seems complex, it does not seem unmanageable. However, a friend working for a U.S. carrier cautioned me to be careful because his carrier has been getting “clobbered” by USF. He told me that if I purchase the International to U.S. VoIP access routes from USF contributors, these companies are likely to make us pay an outrageous amount on my international to U.S. sales.
My friend explained it this way: if I have $1Million annually in sales and 100% of those sales were international to U.S. calls, then a carrier that is a USF contributor can make me pay $100K in USF fees since I am a non-contributor. He stated that one of his underlying carriers told him that the FCC allows this, and leaves it up to these USF contributors. My friend then told me that of the $1Million annually in sales, if more than $100K was U.S. to U.S. calls, I would pay 10% on the $100K revenues from U.S. to U.S. calls, which equals $10K but that the other 90% ($900K) would be exempt from USF and I would be charged about 0.5% since I would be considered a USF contributor. That means $10K to $20K, if I am USF contributor vs. $100K for being a non-contributor. My options are that I start finding non-contributor companies to buy from or get into the business of offering U.S. to U.S. calls, which I know nothing about and have no interest. This would also complicate the international business motive for acquiring the telecommunications company in the first place, making the deal a no-go.
What do you know about this type of regulatory strategy and is it worth it? Is this going to get better over time?
Cordial Regards, “Things Fall Apart”
Dear TFA:
The strategy that your friend is alluding to in your e-mail seems to be based on the difference between being a direct contributor versus an indirect contributor to USF. Both the Communication Act and FCC rules impose obligations on providers of interstate telecommunications services, including resellers and carriers when it comes to USF contributions. Under CFR Section 64.1195(a) and FCC orders supporting it, all carriers that provide interstate (and international) telecommunications services must register with the FCC by submitting information requested on FCC Form 499-A. Unless a carrier’s revenues are de minimis, FCC rules require providers of interstate telecommunications to file revenue information on both the Form 499-A and FCC Form 499-Q as they are considered to be direct contributors to USF. Should the carrier’s revenues be of an international nature, its revenues are considered de minimis, and the carrier is not required to directly contribute to USF, but may be an indirect contributor by and through other carriers who sell telecommunication services to that carrier and charge applicable USF to them on such services. The operative word here is applicable USF.
It appears that your business model is concerned with inbound U.S. termination of calls from international destinations. Before digging too deep into your question as to the above “USF Strategy”, I think it best that you consult regulatory counsel as to the applicability of USF to your specific model to determine exactly where your acquired company will stand in relation to USF contributions. This is because that answer depends in large part on how that company is currently reporting its revenues on the Form 499-A and/or 499-Q. It may also be wise to incorporate an opinion letter on the matter by regulatory counsel as a part of your due diligence, instead of reliance on industry hearsay.
The reason is that industry hearsay has lead to a lot of confusion about how USF functions. One of the primary misconceptions is that carrier de minimis status for USF equates to carrier exemption for filing Form 499 or payment of any regulatory fees. Unfortunately this is not the case; USF is only one of several regulatory fees that are assessed from the 499-A. Carriers now battling retroactive Telecommunication Relay Service Fees (TRS) can attest to the consequences of that misconception. The 499-A is used to administer and fund both USF and TRS programs simultaneously.
Unless a carrier is specifically exempt, CFR Section 54.706(a) requires all providers of interstate telecommunications services, including those that provide “resale of interstate services,” to contribute to the USF. Likewise CFR Section 64.604(c)(5)(iii)(A) requires carriers and providers of interstate telecommunications to contribute to the TRS Fund based on their interstate end-user telecommunications revenues. The Universal Service Administrative Company (“USAC”) administers the USF, and the National Exchange Carriers Association (“NECA”) administers the TRS Fund. USAC bills contributors monthly, based on the information they report on Form 499-Q, with an annual “true-up” based on the information reported on Form 499-A. NECA bills contributors annually.
Now let’s talk about your friend’s suggested USF “strategy”. This strategy follows a principle of blending services and revenues to shift from an indirect contributor to a direct contributor at a lower liability threshold, the idea being it is better to pay less directly to USF, than it is to pay indirectly through carriers that charge the full amount of USF across all services. This type of strategy was common among telecom resellers who offered a broad array of services and could blend in those services to their advantage with little adverse costs to their overall operations. The problem is that this is not a universal strategy and must be weighed with your particular business model. I really cannot tell whether or not this strategy will be of any advantage to you in the end-game scenario.
Here is where I see the true question for your regulatory counsel: what is the statutory and regulatory authority underpinning the applicable USF on inbound international traffic into the U.S. and how can that be incorporated into your business model to your advantage? As you have stated, you are in the process of due diligence. This is perhaps the best time to evaluate all aspects of the commercial model and the factors that can impact it – including the consequences of direct or indirect contributions to USF. I would not depend on industry hearsay strategies to be the determining factor here. You need to get feedback from professionals versed on the legal and regulatory aspects of the question before canceling or proceeding with the closing on the telecom company. I hope this helps.
Good Luck and Success in the Industry.
Attorney Edward A. Maldonado is President of the Regnum Group, Inc. and the
Maldonado Group. He can be reached at eam@maldonado-group.com.
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