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Feb 15, 2007

The Legal Line

Ed Maldonado

Dear Ed & Legal Line:This is a question about a regulatory fee notice we got some time back. My company provides Pinless long distance through a prepaid account that allows ANI recognition access by our consumer. The service we provide is basically a VoIP service. Prior to the 2006 FCC Prepaid Calling Card Order, our company’s position was that we were primarily a VoIP service and exempt from USF liability based upon our completion of the FCC’s own 499 worksheet. After July 2006, we recognized that regulations had changed and we immediately filed for 499-A Filer registration. Late in September 2006, we got a USAC Invoice in the amount of $158.00 dollars for contribution to the Telecommunications Relay Service. I do not believe we filed a 499-Q at that point, and, have not yet filed a 499-A for 2006, so we figured that USAC had made a mistake and therefore did not pay it.Since then, we have received several notices to pay USAC that have gotten more and more aggressive over time. The notices cited that as a licensed common carrier, we are obligated to pay this fee. The last letter we received was entitled “Final Demand” and had all the statutory bells and whistles to look like USAC really meant it. We got scared and paid the TRS Invoice immediately. However I still don’t really understand what TRS is and how USAC can enforce it so aggressively. Is it connected to the 499-A registration or our Section 214 Authority? I am just looking for some clarification.TRS’edDear TRS’ed:Thank you for your question. Before delving into the FCC 499 Form, USAC and the TRS, it important that you, as a VoIP provider, understand how the regulatory landscape has changed in recent years and how it hasn’t. There are a number of misconceptions floating about the industry right now. First of all, as of June 2006, your company and/or its services effectively fell under regulatory fee contribution obligations of the FCC through either the Common Carrier definition or the Telecommunication Services definition. This means that whether many VoIP providers realize it or not, or seek the proper FCC licensure and registrations or not, they will be treated by the FCC as other “214 Holders”, “FCC 214”, “214 Carriers”, “214 FCC” carriers, and ”214 Authority” carriers when it comes to the assessment of certain regulatory fees. These are classifications that have been hard for many VoIP providers to internalize in the past. Prior to June 2006, many VoIP carriers hoodwinked themselves by thinking that application for FCC 214 Authority was the sole triggering event for regulatory fee obligation. For this reason, many steered clear of applying for 214 Licensure (whether they legitimately needed to or not) but did business with larger carriers that required them to have a 499-A Filer ID for transactional purposes. This seemed to be a proper course of action for many VoIP providers at the time – the way they figured it, VoIP fell outside the scope of Universal Service Fund Contributions (USF) due to then existing categories on the FCC Form 499-A, and in their minds, 214 Authority = FCC regulation and fees. The 499-A Filer ID allowed them to show pass-through of IP services and VoIP traffic without being “regulated”…or so it seemed.Now enters the 2006 FCC Prepaid Calling Card Order and VoIP-in-the-Middle Order in the third quarter 2006. The Prepaid Press covered this extensively so look it up online if you need any particular details, however the long and short of it is that these orders clarified that VoIP services and VoIP providers are now required to contribute to USF under a reduced percentage of traffic or safe harbor standards. They are also required to file the 499-A report, and 499-Q reports, along with other required filings of common carriers. The actual language of the FCC 2006 Prepaid Calling Card Order utilizes the classification of “Interconnected VoIP Carriers” which is a definition borrowed from the FCC’s E-911 Order. This classification is not a part of the Telecom Act itself, but is instead, a classification developed by the FCC to accommodate changes in the technologies used by telecommunications providers. The net effect is that VoIP providers that traditionally did not file FCC 499-A, or did not have 214 Authority before, are now coming into full federal compliance, and reporting and making their required contributions as common carriers for the first time. In general, it sounds like your company is ahead of the game when it comes to compliance for a VoIP provider. I must commend this. Many VoIP providers address their obligations only after receiving a Letter of Inquiry or Notice of Apparent Liability from the FCC’s Enforcement Bureau - this is when it is far too late. Similarly, the Universal Service Administrative Company, the independent, not-for-profit corporation designated as the administrator of the federal Universal Service Fund for the FCC, has become better organized in coordinating information reported from contributing carriers to identify non-reporters and contributions owed. See for more info. This evolution in USAC has fast-tracked the traditionally slow billing and collection of USF, TRS, and other regulatory fees from companies that are contributing carriers. USAC is more aggressive in crosschecking reported traffic revenues based upon 499-A Filer IDs that it can use to see gaps in reported 499 revenues between reporting carriers and non-reporting carriers. Better documentation and tracking of this by USAC has also moved the FCC’s Enforcement Bureau to more quickly identify violations of non-reporting and then assess fines against violating carriers (as much as $200,000.00 USD, and higher, in some instances and The result is that now, more than ever, it is necessary that common carriers, be they VoIP, prepaid or otherwise, need to be timely with both regulatory reporting and contributions of amounts rightfully owed. Into this backdrop, falls your question.The TRS, or Telecommunications Relay Service Fee, is a fee recovered from contributing common carriers to offset costs and expenses associated with building telecom resources/services for blind and hearing impaired end-users. Currently, the TRS is calculated on 0.00356 of interstate and international revenues. Based upon your e-mail, it seems that your company reported revenues at some point in third quarter. This probably was on a 499-Q, because USAC assesses TRS from reported revenues, not arbitrary revenues that could be challenged on administrative appeal. My guess is that your company reported revenues of about $50,000.00 USD to equate to that $158.00 amount of TRS. This is a relatively low number for a telecom company to report in a quarter, so it may have even been a report on the 499-Q from second quarter. Either way, it leads me to believe that your company applied for the 499-A Filer ID earlier than July 2006. You may want to check on that issue. The bottom line is that your company likely reported interstate and/or international revenues on Form 499 reporting prior to the issuance of the assessment of TRS by USAC and the USAC invoice. Like many other VoIP and telecommunication carriers, you and your company are now discovering the hidden dragon that is TRS, and other FCC enforced regulatory fees. While much attention has been focused on Universal Service Fund Collection (USF) as of late, regulatory fees, other than USF, are equally assessed from revenue data collected on the FCC Form 499. This has surprised some VoIP providers. Simply being “de minimis” for USF liability does not mean that other fees don’t apply. These regulatory fees include NANPA (calculated on 0.0000021 of interstate and international traffic), LMAPA (calculated on a fair percentage of use formula), and the FCC regulatory fee (calculated on 0.00243 of interstate and international revenues). Although the percentages are not high percentages of revenues, if a company has generated major traffic revenues over an extended period of time (2 to 4 years) and has not previously reported on 499-A filing or contributed to these fees, the overall bill for back-owed amounts can be steep when back-filings are made. A VoIP carrier that earns revenues of millions of dollars on interstate and international VoIP traffic should be particularly sensitive to this.For most VoIP carriers and services, the assessment of such regulatory fees is a daunting revelation in their cost of business. Unlike before, the murky regulatory status of VoIP is no longer an issue to shield to FCC regulatory obligations, and, federal regulatory reporting and compliance are required. I would like to tell you that when it comes to the annual compliance, the only thing you have to worry about is the FCC 499 Annual Report and the FCC 499Q Quarterly Reports – however that would be just telling you what you want to hear, not what you need to hear. If you have 214 Authority as a VoIP carrier or provider, there are annual FCC CPNI and FCC Quarterly CPN Certifications that may be applicable to your company. There are also statistical reports that are required by the FCC from all common carriers (214 holders). Since 1997, the FCC has required common carriers to file an annual International Circuit Report (to assess what telecom infrastructure they utilized) and an annual International Traffic Report (to assess the migration of telecom traffic). The FCC keeps these reports strictly for statistical purposes, and reporting does not have any potential fee liabilities connected to them - unless a company incurs penalty fees for failing to file these reports on time, then late fees are applied.The administration of federal regulatory reporting has changed in recent years. What you see today is not some disorganized and isolated system of regulatory reporting, but instead, a conscious effort to have multiple sources of data, that the FCC can cross reference, being used to ensure that all are paying their fare share. The aggressive stance of both USAC and the FCC Enforcement Bureau are good examples of this. In the past, it was often a joke for VoIP providers to even consider spending money on compliance or worry about regulatory fee liabilities. Today, I must recommend that all VoIP Common Carriers have a tight compliance department, or outsource those functions to someone that specializes in compliance, to ensure that they are on top of what is required with no surprises from USAC or the FCC. The consequences of failing to do so can result in fines, penalties, and even loss of 214 licensure. For this reason, it is ultimately more cost effective to establish an organized compliance program or plan than to rely on your ability to react to USAC or FCC Notices as they may arise. This is an important issue, so contact your legal or regulatory counsel if you have questions about TRS or federal compliance. TRS’ed, its better to be prepared than surprised when it comes federal regulatory compliance and fee contributions.Good Luck and Success in the Industry.Send your questions

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