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VoIP User Beware: USF Contribution Factor Hits New High

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Quietly, without any fanfare (likely because it knew that the reaction might be, um, explosive), the Federal Communications Commission (FCC) last Friday, June 12, announced that the contribution factor for Universal Service Fund (USF) would reach its highest level ever— 26.5%. You didn’t misread that… 26.5%.
 
That’s 26.5% assessed against virtually almost everything except local service. While this increase hasn’t received a ton of press, it’s the highest rate ever even contemplated. Comparatively, rates for Q4 2019, Q1 2020, and Q2 2020, respectively, have been 25%, 21.2%, and 19.6% — a moving target, for sure.
 
That certainly makes it worth consideration, and something that enterprise IT communications decision makers need to be aware of given the effect that it will have on the bottom line of communications services bills. It’s not negotiable, and because the USF is an assessment in the form of a surcharge and not a tax, it’s subject to state-levied sales tax.
 
Calculating the Contribution Factor
Let me explain the process. Providers/carriers are obligated to file quarterly forms that reflect their traffic and revenue. From this information, the Universal Services Administrative Co. (USAC), an FCC-designated independent not-for-profit administrator, determines how much money it will need to fund its programs for the coming quarter. It determines the percentage for the contribution factor based on a complex calculation, and announces the amount due for the coming quarter. Obligated by statute, the providers must pay into the USF, which supports all sorts of worthy endeavors (more on that in a minute). Providers have the option (and I haven’t met one that hasn’t taken advantage of it) to pass this charge along to their customers with certain limitations.
 
This is where the small print and the law matters. Very specifically, carriers are explicitly prohibited from charging more than the quarterly contribution factor, in this case 26.5%, to customers for USF. That doesn’t mean that they can’t make up other lines — “property tax allocation,” “administrative fee,” and so on — that sound like government-imposed fees and surcharges but are really revenue. What is means is that for a line marked as “Universal Service Fund,” the charge cannot be higher than the quarterly contribution factor. However, if the line item is named somewhat differently — “universal connectivity charge,” for example — all bets are off and the customer is out of luck.
 
The federal government created the USF as part of the Telecommunications Act of 1996, to support worthy communications endeavors like the funding of schools and libraries, rural health care, Lifeline, and delivery of service in what are deemed “high cost” areas. Currently, the annual budget for support of these services is $10 billion. Interestingly, funding for rural health care initiatives predated the COVID-19 crisis, which has made telehealth programs more crucial than ever.
 
Completing the required quarterly and annual forms is challenging, to put it mildly. I help two small providers do this work, and the only rough equivalent I can make is that it’s akin to preparing a complicated tax return times 10. The questions require answers that are not always consistent with how providers bill for services — think square peg/round hole — so providing the required information based on the distinctions and categorizations required is incredibly difficult.
 
VoIP & the USF
With this in mind, one of the distinctions that the form requires is between revenue generated by interconnected VoIP traffic and non-interconnected VoIP traffic. Interconnected VoIP traffic is a service that (see formal definition here):
 
  1. Enables real-time, two-way voice communications
  2. Requires a broadband connection from the user's location
  3. Requires Internet Protocol (IP)-compatible customer premises equipment (CPE)
  4. Permits users generally to receive calls that originate on the public switched telephone network (PSTN) and to terminate calls to the PSTN
  5. For purposes of compliance with the FCC’s 911 obligations, fulfills each of the above and permits users generally to terminate calls to the PSTN
Alternatively, non-interconnected VoIP service is defined as a service that:
 
  1. Enables real-time voice communications that originate from or terminate to the user’s location using IP or any successor protocol
  2. Requires IP-compatible CPE
  3. Does not include any service that is an interconnected VoIP service
 
Essentially, non-interconnected VoIP services are those that are not connected to the PSTN.
 
Make Your Voice Heard
I’ve provided these definitions not to put you to sleep, but to make you aware that the FCC is considering revising the current ineligibility of these services to be subject to USF assessment. Comments are due by July 13, and can be submitted by accessing the FCC’s electronic comments site. The identifying information is as follows: WC Docket No. 06-122, GN Docket No. 09-51.
 
As of this moment, interconnected VoIP services are subject to USF assessment but interconnected VoIP services are not. However, the FCC is now soliciting comments on changing this practice and subjecting all VoIP services, including those that are one-way VoIP (non-interconnected by definition) with those that are interconnected. While these non-interconnected services do not constitute a majority of VoIP services provided, this change in eligibility could have a significant impact on carriers’ costs (and ultimately customer costs) going forward.
 
If this issue is important to you, now is absolutely the time to speak up and share your experience with those who write the rules. Your comments — or lack thereof — could make the difference. And remember… when you’re reviewing a new agreement, focus on the terms before the price because terms tend to be flexible, moving targets.

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