Holy shit.

Court: Domain fees appear illegal By Brock N. Meeks

WASHINGTON, Feb. 2 - A federal court Monday issued a temporary injunction barring the federal government from spending some $50 million it has collected from the registration of Internet domain names. That money forms a pool of funds intended to be spent for improving the Internet. On Monday, the court sided with the plaintiffs in a lawsuit that claims those fees constitute an illegal tax.

The money is part of a so-called "intellectual infrastructure fund," which is funded by 30 percent of all fees paid to register an Internet domain name. Initial domain names cost $100; renewal of domain names is $50 annually. The remainder of registration fees goes to Network Solutions Inc. (NSOL) to cover its cost of maintaining the registration service.

Network Solutions operates as a monopoly, stemming from a National Science Foundation government grant. That grant is supposed to end in March; the White House issued a proposal Jan. 30 that would move domain name registration into the private sector.

In October, six domain-name holders filed suit in U.S. District Court alleging that the National Science Foundation had no authority to allow Network Solutions to collect any money in excess of its cost of providing the registration service. Further, the suit charged, the 30 percent set-aside amounts to an unconstitutional tax.

Judge Thomas Hogan said Monday that the plaintiffs "have made a significant showing that the (intellectual infrastructure fund) is an illegal tax."

Hogan said there is "no litmus paper onto which the Court can drop a regulatory assessment such as this one, hoping to see whether the paper comes up blue for tax or pink for fee." Justice Department lawyers had argued in court that the domain-name registration fee was exactly that, a fee, because it was paid voluntarily and therefore couldn't be considered a tax.

But Hogan disagreed, writing that "there is no dispute that the assessment (registration fee) is involuntary - it is automatically charged to every domain registration."

In 1995 Network Solution's contract was amended to allow it to begin collecting fees for the registration process, which it had done for free since 1993, when its contract was issued. The registration fees set off a firestorm of criticism in the Internet community. The Intellectual Infrastructure Fund was supposed to be used for the betterment of the Internet for the community as a whole; however, no plan has ever developed on how to spend the money, which is held in escrow.

Because no plan had been developed to spend the fund money, Congress rushed into the vacuum late last year and simply appropriated some $23 million. Congress earmarked that money to be spent on the Next Generation Internet project, which President Bill Clinton highlighted in his recent State of the Union speech.

"Under federal law, no independent executive agency - such as the National Science Foundation - can collect fees that exceed the cost of providing the service they are administering," said William Bode, attorney for the plaintiffs. "NSI, the agent of NSF, spends less than $5 to register domain names, yet it charges a registration fee of $100 and renewal fees of $50 per year," he said.

Network Solutions did not return calls for comment.

Bode also argued that only Congress has the authority to tax and that no such authorization has taken place. The Justice Department argued that because Congress appropriated the $23 million from the infrastructure fund, it had essentially ratified the tax.

Bode argued that ratification of a tax can't take place in authorization bills. Judge Hogan agreed, noting that ratification is a legislative function and that "it is well known that Congress does not normally legislate through appropriations bills." Hogan added: "Congress may have intended to grant NSF the authority to collect the assessment, but it has not effected a legal ratification."

The suit also is seeking antitrust damages, alleging that the NSF violated the competition in contracting act when it allowed Network Solutions to begin collecting the $100 fee. Bode says the competition act requires the NSF to re-bid a new contract, not simply amend it.

The temporary injunction "paves the way for our motion, which we'll file in two days, to require NSI to return all registration renewal fees which exceed the cost of providing that service," attorney Bode said. "We think that cost [to NSI for the registration process] is significantly less than $10, probably $2 to $3," he said, "which would mean that there would be a refund of approximately $100 million in our judgment."