Principles of Neutrality Missing from FCC Systems Integrator Exemption Rules

March 24, 2015
By: TMCnet Special Guest
Jonathan S. Marashlian & Seth L. Williams

A defect from another decade codified in a little known Federal Communications Commission (“FCC (News - Alert)”) rule is causing a whole lot of headache for the systems integration industry. Regulations intended to protect systems integrators from the heavy hand of government regulation are now causing the very same systems integrators to think twice before migrating from reselling traditional telecommunications to provisioning Voice over Internet Protocol services to their enterprise customers.  This hesitation, in turn, erects an unnecessary and potentially costly hurdle that systems integrators must overcome in order to fulfill the ever-increasing demands for technologically advanced communications services.

Why the imbalance?  Because even as the FCC purports to encourage the transition to an “All IP” environment, the government agency responsible for regulating telecom companies has failed to update its rules to ensure that a key regulatory exemption enjoyed by systems integrators reselling telecommunications applies equally to providers of VoIP services that also happen to qualify as systems integrators.  The result is an uneven playing field with perverse incentives.  While certain systems integrators will begrudgingly incur higher regulatory compliance burdens and costs in order to meet the demands of their customers, others may choose to avoid dealing in VoIP technologies all together, simply to avoid the heavy hand of regulation.  This Hobson’s Choice need not exist but for the FCC’s failure to ensure its regulations maintain pace with changes in technologies and market demands.

Systems Integrator Exemption:  A Narrow, yet Complex and Powerful Exemption

The systems integrator exemption, introduced by the FCC in 1997, allows systems integrators that derive less than five percent of their systems integration revenues from the “resale of telecommunications” to avoid filing Forms 499-A or 499-Q and to avoid any Universal Service Fund (“USF”) contributions.  Many systems integrators also provide resold telecommunications on a “private carrier” basis, thus enjoying even greater exemptions from all FCC Title II regulations; the same regulatory burdens Internet Service Providers have bemoaned and fought hard to avoid during the recent Net Neutrality debate.

Systems integrators are typically “non-facilities-based, non-common carriers” that provide packages of services and products to their clients in a bundle.  A common example is the implementation, management, and maintenance of information systems (i.e., computer networks, PBXs).  The systems integrator builds the system for a client by combining multiple products and services, including, in some cases, telecom services.  Companies use these integrated systems to avoid the high cost of building and managing their own systems.

The FCC pointed out that certain systems have a minimal telecommunications component, for instance, remote data processing services or the provision of telecommunications and computer equipment.  As a result, they do not “significantly compete with common carriers that are required to contribute to universal service.”  The FCC concluded that systems integrators are in the business of integrating customers’ computers and other informational systems, and it found that providing a telecommunications service is incidental to that core service.

Limited Applicability

When the FCC created the systems integration exemption, it applied the exemption to the entire scope of then available or then known regulated communications services. At the time, however, interconnected VoIP (“I-VoIP”) services were not in existence and were not explicitly included in the rule.  Instead, the rule only applied to “telecommunications” – known today as legacy PSTN telecommunications services.

Later legal developments never rectified the problem.   I-VoIP only became a part of FCC lingo in 2005, but even then, the FCC chose to create a new definition and new set of rules for I-VoIP technologies. That decision meant that I-VoIP has never been classified as a “telecommunications service” for the purposes of FCC regulatory law.

An Uneven Playing Field

As a result, the systems integrator exemption only arguably applies to the provision of I-VoIP services with respect to USF contributions because, in extending USF contribution obligations to I-VoIP services, the FCC treats I-VoIP providers as “providers of interstate telecommunications” for purposes of USF obligations only.  However, in extending other regulatory obligations to I-VoIP services, including Telecommunications Relay Service (“TRS”), numbering administration, and local number portability contribution obligations (all of which require I-VoIP providers to file Form 499 even if excused from the filing duty for purposes of the USF), the FCC has explicitly refused to decide whether I-VoIP services constitute “telecommunications services.”  Therefore, for systems integrators offering I-VoIP, the exemption does not provide the primary benefits it was designed to offer systems integrators, such as relief from the regulatory burdens of registering with the FCC, annually and quarterly filing Form 499s and otherwise complying with a host of Title II common carrier regulatory burdens.

A systems integrator that integrates communications services using I-VoIP would, therefore, be required to file Forms 499 and be liable to pay into all of the FCC’s Title II regulatory programs other than the USF, while a systems integrator using legacy services would not.  Even a technologically savvy systems integrator would take the hint and decide not to offer I-VoIP services to its customers to avoid the potential administrative burdens, enforcement risk, and added costs that systems integrators offering I-VoIP service can incur.

Beyond the Systems Integrator Exemption

Moreover, the FCC has extended other Title II regulations to I-VoIP services, such as hearing aid compatibility and other disability support rules, customer privacy rules, and 911 emergency services rules, to name just a few.  Historically, systems integrators have not been required to comply with these FCC rules because they typically offer what the FCC calls “private carriage” service, in which a provider offers telecommunications on an individually negotiated contractual basis.  However, the distinction between private carriage and common carriage telecommunications simply does not exist for I-VoIP services, at least not under existing FCC rules and precedent.

Because of its piecemeal extension of Title II rules to I-VoIP providers, the FCC has created a situation in which all I-VoIP providers are subject to most of the Title II regulations they would have been subject to if the FCC had classified I-VoIP as a telecommunications service, yet I-VoIP providers cannot avoid Title II regulation by offering their service on a private carriage basis.

The FCC has said time and again that it wants to incentivize the transition from traditional to advanced communications technologies.  But for systems integrators today, the incentives cut the other way.  These providers have every reason to avoid providing I-VoIP-based services.

As an easy first step to fixing the systems integrator exemption and moving towards clarity for I-VoIP providers, the FCC should clarify that the systems integrator exemption applies to I-VoIP services and that qualifying for the exemption eliminates a provider’s obligation to file Form 499 or contribute to any of the FCC’s Title II programs.  On behalf of our affiliated regulatory consulting firm, The Commpliance Group, our firm has petitioned the FCC to do just that.  A copy of the Petition for Declaratory Ruling is available here: Petition of The Commpliance Group, Inc. for a Declaratory Ruling that the Systems Integrator Exemption Applies to the Resale or Provision of Interconnected VoIP by Systems Integrators.  We are hopeful that the FCC will respond by reversing this distortion that has the potential to slow the deployment of advanced communications services and disrupt the IP transition. 

About the Authors: Jonathan Marashlian is the Managing Partner of Marashlian & Donahue, LLC, The CommLaw Group. Mr. Marashlian is the winner of multiple Lexology / International Law Office (“ILO”) Client Choice Awards, named overall winner in the Telecom Law-U.S. category. The CommLaw Group has been honored as the Leading Customer Service Law Firm of the Year and Best Communications Law Firm in the U.S. by ACQ Global Awards for three consecutive years.

Seth Williams, an Associate at The CommLaw Group, co-authored this article.  Mr. Marashlian may be reached at (703) 714-1313 or jsm@CommLawGroup.com

*Disclaimer: This article is intended for informational purposes only and is not for the purpose of providing legal advice. You should not act upon the information in this article without seeking professional counsel.