Whether you live in New York City or rural Montana, telecommunications providers are there to keep you connected. The COVID-19 pandemic has made staying connected more critical than ever, whether for work, school, or keeping in touch with friends and family—and it’s difficult to see these needs receding in a post-pandemic environment.

One contributing factor that makes connection possible is the Federal Universal Service Fund (FUSF) and programs it supports. All telecommunications service providers contribute to the FUSF to sustain it, and it’s critical they’re mindful of the steps and processes that determine  their contribution amount.    

Following are answers to some of the most common questions related to the FUSF.

What’s the Federal Universal Service Fund?

The Federal Communications Commission (FCC), which regulates telecommunications service providers, established the federal FUSF in its current form in 1996.

The FCC created the FUSF so telecommunications service providers that serve rural areas could offer services that are reasonably comparable in quality and price to those in urban areas, as well as help make affordable services available to low-income consumers, rural health care providers, and eligible schools and libraries.

Administered by the Universal Service Administration Company (USAC), the FUSF received several modifications over the past 10 years. 

What’s the Federal Universal Service Charge?

To fund the FUSF, the FCC requires telecommunications service providers and Voice over Internet Protocol (VoIP) providers contribute a percentage of the amount billed to end-user customers for interstate and international services.

Revenues are reported and contributions are calculated when a provider files the annual FCC Form 499A and quarterly FCC Form 499Q. 

USAC proposes the quarterly contribution factor based on:

• Projected FUSF demand
• Estimated assessable interstate and international end-user revenue

Service providers are then permitted, but not required, to pass on the cost of their contribution to end-user customers in the form of a direct surcharge.

Contribution Factor Increases

Demand on the FUSF grew as the FCC imposed broadband deployment obligations on carriers that receive support. At the same time, assessable interstate and international services, such as traditional landline local and long-distance phone service, steadily decreased.

These compounding factors resulted in the contribution factor reaching an all-time high of 33.4% in the second quarter 2021. For comparison, the first-quarter contribution factors in previous years were as follows:

• 6.7% in 2001
• 9.5% in 2009
• 16.7% in 2017

What Are the Allocation Methodologies for the Universal Service Fund?

Considering the high contribution factor, telecommunications service providers should have a firm understanding of the allocation methodologies available for their services, both from a strategic and a compliance perspective.

Revenue allocation between intrastate and interstate jurisdictions, which is highly scrutinized by USAC, should have detailed documentation and support.

Many services have straightforward assignments based on their primary or actual uses, whereas others, such as private-line circuits and VoIP services, have multiple elements to consider.  

Point-to-Point Private Line Circuits

The jurisdiction of a point-to-point private line circuit isn’t solely defined by the end points of the circuit.

The FCC and USAC abide by what’s commonly known as the 10% Rule, which stipulates that if 10% or more of the traffic traversing a private line is interstate or international in nature, the entire revenue associated with the private line is interstate. The telecommunications service provider isn’t responsible for monitoring the jurisdiction of traffic on the circuit; rather, they can rely upon a self-certification from the customer. 

However, it’s the telecommunications service provider’s responsibility to verify it maintains documentation supporting the jurisdiction of private line circuit, including the access service request and the customer’s self-certification.

Are There Options When Determining Jurisdictions for VoIP Revenue?

Determining jurisdictions for VoIP revenue can present unique challenges considering the nature of the service. However, the FCC provides a few options to service providers.

3 Methods for Determining Jurisdictions

1. Follow the FCC’s 64.9% Interstate Safe Harbor Allocation

This option requires no supporting documentation of the traffic’s jurisdiction and is considered the lowest-risk option as a result.

64.9% of the VoIP revenue is categorized as interstate revenue.

2. Allocate Revenue Based on Actual Call-Detail Records

These records are generally tracked by the switching platform that drives the VoIP calling solution. Allocations based on actual call-detail records require traffic data of all customers and periods, not a representative sampling.

Interstate and international minutes of use are divided by total minutes of use, including local and intrastate, to determine the interstate and international allocation of total VoIP revenue.

3. Conduct a Traffic Study

A traffic study is an analysis of the jurisdiction of VoIP calling over a representative period of time to determine the proportion of minutes that are interstate and international.

Service providers that use a traffic study must make sure the sample is statistically significant—95% level of confidence. They must also provide a thorough explanation of sampling procedures and annually submit the traffic study for USAC review.

Are There State Equivalents to the Universal Service Fund?

Similar to the FUSF, many states have established state-specific universal service funds to offset the cost of service in rural, high-cost areas and to low-income consumers.

In many cases, state legislatures created specific surcharges to fund these programs, which are generally assessed on intrastate and local end-user revenues. They alternatively may be assessed as a flat monthly charge per line or connection.

States with universal service funds have fees ranging from 0.25%–9%, all well below the FUSC rate, currently 33.4%.

The revenue allocation between interstate and international, and local and intrastate revenues, should be consistent with the methodology used in preparing the FCC Form 499A.

Telecommunications service providers need to be aware of both the billing and remittance requirements associated with these state universal service funds. 

We’re Here to Help

If your telecommunications company needs assistance with Form 499A reporting or determining appropriate and strategic allocation of revenue for the FUSF, please contact your Moss Adams professional.