New USF Penalties Stress Timely Compliance

Few regulatory actions seem to captivate attention more than those carrying stiff non-compliance penalties. Where the risk of a proverbial slap on the wrist might translate into lax compliance or worse for some, there is nothing like the introduction of significant non-compliance penalties as a strong motivating factor. Such will likely be the case with the FCC’s new Oversight Order, FCC 07-150, governing federal USF non-compliance penalties.

The new Oversight Order, which became effective on Oct. 24, 2007, changes the USF calculation of penalties related to FCC Form 499 late filing and late payment of USF invoices. For those who continue to meet their USF filing obligations, the newly adopted USF penalties will have no effect. For others, the new penalties should be a wake-up call.

The first round of quarterly filings for 2008 was due last month. The remaining quarterly due dates for 2008 are May 1, Aug. 1 and Nov. 1. All annual reports are due April 1.

What led the FCC to revise its limited USF late-filing penalties? Increasing concern over maintaining USF revenue to meet ever-growing funding demands, coupled with the results of the FCC’s initial 2007 USF filer audit as well as the addition of interconnected VoIP services to the USF contribution base in 2007 and an alarming rise in filer abuses.

Where the most egregious of violators formerly could have shrugged off a maximum $5,000 late-filing fee penalty, violators now are subject to uncapped financial penalties that continue to accrue until the form is received by the USF administrator, and to active federal enforcement action.

USF filers whose annual federal USF contributions are less than $10,000 qualify for the de minimis exemption and are not required to remit USF contributions. Annual reporting and contributions to other federal funds nevertheless remain in effect.

The new measures adopted in the FCC Oversight Order followed the results of the commission’s "broad inquiry into the management, administration and oversight of the USF." Of particular interest are the new penalty and interest assessments adopted for late-filing or delinquent reporting under FCC Forms 499A (annual) and 499Q (quarterly) reports, and late or delinquent USF payments, consistent with the Debt Collection Act of 1982 and the Debt Collection Improvement Act of 1996, as amended.

Late FCC Form 499 Filing Sanctions

Prior to Oct. 24, 2007, a one-time charge of .005 percent of the annual revenue for a late-filed FCC Form 499A Worksheet would apply. The minimum assessment imposed by the Universal Service Administrative Co. (USAC), the USF administrator, was $100 and a maximum assessment was $5,000, regardless of how long an entity had remained out of compliance. However, according to the FCC, this didn’t "provide sufficient incentive to contributors to comply with the reporting requirements, compensate the administrator or the commission for additional work involved, or compensate the Universal Service Fund for the time value of money lost when the worksheets are not filed and funds are not contributed in correct amounts."

Late USF Payment Fees

The commission restructured USF penalty assessments by imposing far more stringent penalties, which included removal of penalty caps and increased overall assessments in late-payment penalty calculations "to compensate the USF for the time value of money, and also facilitate enforcement action against carriers who have substantial delinquencies."

With respect to delinquent USF debt specifically, the commission adopted two separate penalty assessment components: 1) interest penalties applicable to delinquent debt; and 2) additional penalties for debt(s) that are more than 90 days old. Delinquent debt now is subject to a penalty rate of the U.S. prime lending rate plus 3.5 percent of the amount due.

Any portion of debt unpaid more than 90 days incurs a penalty of 6 percent per year from the date of delinquency. So the total interest and penalties for debt more than 90 days delinquent will be U.S. prime lending rate plus 3.5 percent plus 6 percent.

Prior to adoption of the new penalty regime, a company owing $10,000 for revenue reported on the Feb. 1 quarterly FCC Form 499Q, and that late-filed the form in July, would be subject to a single $100 late-filing fee. Under the commission’s new penalty assessment rules, the minimum late-filing fee would be $600, or a minimum of $100 per month for each of the five months when the filing had been due, and more if the amount due exceeded the minimum $100-per-month late fee; a function of the prime lending rate plus 3.5 divided by 365 days and then multiplied by the number of days the filing was delinquent. It should be readily apparent that late-filing penalties could escalate rapidly.

Application of Payment

The Oversight Order further clarified that any payments received by USF filers would apply to interest payments first. The commission stated that if a USF contributor pays USAC less than the amount due, USAC will adhere to the "American Rule." That’s where the payment first is applied to outstanding penalty and administrative cost charges, then applies next to accrued interest, and, finally, to outstanding principal. When it comes to applying the payment to outstanding principal, USAC puts it toward the contributor’s oldest past-due amounts first.

Delinquencies applicable to periods prior to Oct. 24, 2007 are subject to the former penalty regime.

Reporting accuracy will be verified through ongoing FCC USF filer audits, "to ensure program integrity and to detect and deter waste, fraud and abuse."

The new USF penalties make clear the FCC’s concern for timely USF reporting and remittance compliance. Where once late filers were subject to a capped one-time late fee, new late fees are subject to escalating interest for as long as the delinquency remains. USF filers should continue to give USF compliance requirements the focus now demanded by the FCC’s new rules. Attention to filing deadlines and timely reporting and payment will ensure that the new penalties have no impact on filers’ business. The full Report and Order is available at  http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-150A1.doc.

Andrew Isar is president of Miller Isar Inc., a national regulatory relations and compliance firm, based near Seattle. Miller Isar Inc. and The Klein Law Group PLLC have partnered to provide a comprehensive USF reporting and contribution practice. For additional information, please visit Miller Isar Inc. at www.millerisar.com.

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