Free Services Advisory
Applicants and service providers are prohibited from using Schools and Libraries (E-Rate) program funds to subsidize the procurement of ineligible or unrequested products and services or from participating in arrangements that directly or indirectly reduce the applicant’s non-discount share.
Basic Principles
Funding requests or applications inconsistent with the following principles are contrary to program rules and will be denied.
- Account for Promotional or Fringe Benefit Value: The value of all price reductions, promotional offers, and “free” products or services must be deducted from the pre-discount cost of services indicated in funding requests.
- No Cost-Shifting: Costs, trade-in allowances, and discounts must be fairly and appropriately derived. For example, the cost for eligible components may not be inflated in order to compensate for discounts of other components not included in funding requests.
- Applicants may not trade in equipment purchased with program funds sooner than five years after the date that the equipment was installed.
- Once five years have elapsed, applicants may trade in equipment and may use money received from the trade-in to “pay” the applicant’s non-discount share on other eligible equipment.
- Eligible/Ineligible Cost Allocation: A proportionate cost allocation is required between eligible and ineligible components.
- The FCC Form 471 funding request(s) and the applicant’s inventory or asset register must identify the ineligible components including product name, model number, and location.
In addition, applicants and service providers are cautioned that willful violations of program rules can result in criminal penalties.
Examples
Example 1: Applicant receives a discount for services received.
Assume that a service provider’s regular price for a service is $100, but that it will offer the applicant a 20 percent price reduction. The funding request for this service must specify $80 as the pre-discount cost, and the applicant must pay its share of this $80 cost. It is a violation of program rules to submit a funding request in excess of the actual cost expected to be charged and paid.
Example 2: A discounted or free service is provided in exchange for applicant purchase of an eligible service.
Assume that a service provider offers to provide an eligible service for $200, and also offers a 60 percent discount on a $300 ineligible service when both the eligible and ineligible service are purchased together. (The 60 percent discount means that the applicant would need to pay only 40 percent of the usual $300 cost.)
Because such an arrangement may have the effect of using program support to subsidize ineligible services, any discounts (or free services) must be allocated proportionately. For this example, the pre-discount cost of the eligible service should be shown as $128, as illustrated in the following calculations:
| Eligible Service | Ineligible Service | Total | |
| Usual cost for both services | $200 | $300 | $500 |
| Quoted cost for both services | $200 | $120 ($300 usual cost reduced by 40% discount) | $320 |
| Percent of usual cost to be paid | 64% ($320 / $500) | ||
| Proportional cost of eligible service | $128 (64% of $200) | ||
Example 3: A request for proposal (RFP) specifies both eligible and ineligible services and seeks only a single price for the mixed-eligibility bundle.
Assume that an applicant issues an RFP that seeks internet access (eligible), high speed broadband (eligible), and web-hosting (ineligible). Responses received provide only a single cost for the bundled package.
A funding request that provides only a single cost for both eligible and ineligible components cannot be approved under program rules. Eligible and ineligible products and services must have separated costs, so that the ineligible components can be subtracted from funding requests.
A limited exception exists to the requirement for separated pricing. In some cases, an eligible product or service can include ineligible components on an ancillary basis, and the full package can be eligible for support if certain conditions are met.
For example, a service provider’s standard internet access service also provides email as a standard component, and this offering is the most cost-effective solution without considering the ineligible features, then the full cost can be submitted as the pre-discount cost in a funding request. The distinction in this case is that the added feature is ancillary, it is not specifically requested by the applicant, and it is a part of the standard internet access package from the service provider.
Example 4: A service provider offers a discount for prompt payment.
Assume that an arrangement between a service provider and an applicant is for a service with a cost of $1,000, but that the service provider offers a 10 percent discount if the applicant portion is paid within 30 days. The amount eligible for funding in this case is the net cost to the applicant for payment within 30 days, or $900. Applicants must choose the most cost-effective solution, and certify to USAC that funds are on hand to pay the applicant share.
Therefore, applicants are expected to take advantage of payment discounts, when offered, and must seek support only toward the actual costs (in this case, $900) expected to be paid.
Example 5: A service provider donates funds to a grant organization, earmarked for an applicant.
Assume that an applicant seeks an eligible technology upgrade that costs $100,000. The service provider donates $10,000 to a grant organization, with a stipulation that the money goes to the applicant. This is a violation of program rules.
Program rules do not restrict applicants from accepting grants from bona fide organizations, nor do they restrict service providers from attempting to help applicants obtain grants from such organizations, so long as the grants and organizations are completely independent of the service provider.
Additional Requirements and Restrictions
The examples provided here are representative. Similar arrangements that effectively subsidize procurements or provide greater discounts than the applicant is entitled to would also be violations of program rules.
Any party with a potential financial interest in the E-Rate program is subject to the guidance provided. For example, a subcontractor to a service provider may not engage in the prohibited activities described here.
Applicants are required to maintain records of the competitive bidding process, including all bids obtained and the factors used in evaluating the responses and the determination of the winning bidder. These records must be provided to USAC or auditors on request.