By GENE KOPROWSKI
Special to THE WALL STREET JOURNAL INTERACTIVE EDITION
THE U.S. is no stranger to tax disputes -- after all, British taxes on tea and
other trans-Atlantic trade helped sparked the American Revolution, while
property-tax revolts in California powered Ronald Reagan's rise to the White
House.
Now, cyberspace has a tax dispute of its
own -- one that centers around what one
side calls an "unauthorized Internet tax"
and the other side sees as crucial seed
money for the speedier, smarter Internet
of the future. The money at stake isn't a huge amount -- about $60 million --
but it's taken on a far greater symbolic important. If that money is spent, one
side argues, a dangerous precedent could be established that could affect how
the federal government taxes all kinds of activities. But the other side counters
that if the money isn't spent, experimentation with approaches to relieve
Internet congestion will stall -- a potentially grave situation given the
increasing economic importance of the global computer network and the
hordes of new users flocking to it every day.
The battle began last fall, when
Washington, D.C., attorney William
Bode, who represents the American
Internet Registrants Association, filed
suit against the National Science
Foundation and Network Solutions Inc.,
a Herndon, Va., government contractor
that dispenses Internet addresses to
companies, universities and government
bodies around the globe.
The suit charged, among other things, that a portion of the $100 fee for
domain-name registration leveled by Network Solutions was an
unconstitutional tax. Most of the suit was dismissed by a federal court during
the spring and summer. But, perhaps as early as this week, Mr. Bode plans to
file an appeal to overturn the lower-court ruling, and, if successful, possibly
return some of the "tax" to those who have paid registration fees for the last
three years.
"The administration of this domain-name process by the National Science
Foundation is the public scandal of the decade," says Mr. Bode. "We believe
firmly that the court of appeals will find the registration fees charged by
Network Solutions are contrary to the Constitution and contrary to statute."
A Bit of History
Domain-name registration is the process through which a domain name, like
wsj.com, is officially linked with the Internet Protocol number that computers
on the Internet actually use to locate and communicate with each other.
The networks that served as forerunners to the Internet were overseen by the
Defense Department, meaning it fell to the Pentagon to finance registration
efforts. But by the early 1990s, most of the new registrations on the Internet
were from academic institutions. The NSF, a government agency responsible
for funding civilian science projects, stepped up to the plate and assumed
responsibility for nonmilitary Internet registrations. Then, a few years later,
the NSF contracted out the registration process, signing a five-year
cooperative agreement with Network Solutions. (That agreement has been
extended and is now set to expire this week; what will replace it is currently
the subject of considerable angst and anger in the Internet community. But
that's another story.)
By late 1995, commercial demand for Internet addresses was soaring, and NSF
could no longer fund the registration process. So the agency authorized
Network Solutions to begin charging a fee for domain-name registration.
Originally, the fee was $100: Network Solutions got $70, and the remaining
$30 was set aside for the Intellectual Infrastructure Fund, earmarked for
backing research into improving the mechanics of the Internet.
Mr. Bode, representing a group of people who had paid the fees, filed a
multipronged suit in October 1997. He accused the NSF of creating an illegal
monopoly in domain-registration services and charged that Network Solutions
had blocked competition for those services -- and said the assessment of the
domain-name registration fee was unauthorized by Congress, and, therefore,
unconstitutional. Last April, Judge Thomas Hogan, of the U.S. District Court
for the District of Columbia, threw out most of Mr. Bode's suit, but agreed
with that one charge, indicating that because the fees were earmarked for
something not related to domain-name registration services, they amounted to
a tax -- which only Congress can impose.
Mr. Bode began claiming victory, but that victory -- at least for a while --
seemed destined to be a short-lived one. Judge Hogan noted that Congress
could enact legislation that would retroactively declare the tax legal, and
Congress proceeded to do just that. On May 1, President Clinton signed HR
3579, a supplemental appropriations bill that addressed the issue, directing the
NSF to use the money in the fund for Internet-related and next-generation
Internet projects.
In late August, Judge Hogan ruled that Congress' action made Mr. Bode's
lawsuit moot. (The fees, incidentally, have not been collected by Network
Solutions since April 1.)
But Mr. Bode has appealed, arguing that federal law states that the government
cannot charge fees which exceed the cost of providing the service, and adds
that Network Solutions and the NSF have been charging many times more than
the cost of the fee, and racking up "illegal" revenues in the process.
That's something with the potential to affect far more than the Internet, he
says.
"The National Science Foundation is essentially saying that that stricture can be
violated by contracting with a private party to perform a government service,"
says Mr. Bode. "It's an outrageous concept, and, needless to say, if adopted,
would have an ominous impact on public administration."
An Angry Reaction
A spokesman for Network Solutions, Chris Clough, dismisses Mr. Bode's
claims as bluster: As far as Network Solutions is concerned, the case is over
and an appeal is futile. "In our minds, the chapter is really closed on this one,"
he says. "I don't know if there is much further [to appeal] on this."
Meanwhile, some in the Internet community are furious over the suit,
contending that it will harm efforts to fund the next generation of the Internet.
"Let's give this money to universities instead of giving it to a lawyer," says
Andy Sernovitz, president of the Association for Interactive Media, a group of
300 corporate Internet users. "Nobody wants their money back."
Take away the fund, some Internet users warn, and that money will no longer
be available for R&D on high-speed networks or for universities to upgrade
their connections to Internet 2, designed both as a faster, smarter network
reserved for academics who need to send huge amounts of information across
cyberspace and as a testing ground for technologies to be adopted in the future
by the commercial Internet. Eliminate work on those technologies, these users
warn, and you may very well eliminate the technological success stories that
will ensure the Internet is navigable by more and more users in years to come.
Others think that those who object to the fees ought not to be online in the first
place.
"Let's be honest: The cost of this is less than the cost of a client business
dinner," says Lee Duffey, president of Duffey Communications, an Atlanta
Internet-marketing company, and chairman of the Internet advisory panel for
Sen. Paul Coverdell (R., Ga.). "People who object to this ought to reconsider
their viability as a Web business. They should go eat dirt and live in a
cardboard box."
Murky Legal Questions
Mr. Bode says that he supports the idea of funding next-generation Internet
efforts, but adds that those efforts should be paid for out of general federal
revenue.
The passions raised by the case won't be considered by the appeals court. But
outside legal experts indicate that the question of whether or not Congress can
do what it did is murky enough that there may still be plenty for the court to
tussle over.
"I always agree with what the court says, until it is reversed on appeal," jokes
David Maher, a Chicago attorney and chairman of a policy oversight panel for
the Internet Society. "But, seriously, the court -- I think accurately -- stated
that the imposition of the fee was not authorized, and not proper under the
Constitution."
So far, so good. But Mr. Maher says he thinks the court missed part of the
bigger picture when it revisited the issue in August and ruled that
after-the-fact congressional approval of the fees was proper.
"You can't just have a federal agency deciding that everybody is going to pay a
tax, and imposing it world-wide," he says. "Then Congress, retroactively,
authorizes it by tacking on an amendment to an existing bill with no hearings,
and no consideration. ... That is just off-the-wall."
Another attorney, Russell Beck of the Boston firm Epstein, Becker & Green,
P.C., agrees that a decent appeal can be worked up. "I think this can be argued
either way," says Mr. Beck.
And John Muller, an attorney at Brobeck, Phelger & Harrison, a San
Francisco firm that works with a number of high-tech companies, says that
clarifying the matter is important because it will prevent Congress and federal
agencies from "imposing hidden taxes."
Congress itself is again looking into the matter. Senate Majority Leader Trent
Lott (R., Miss.) is looking to repeal the authorization of the fees with an
amendment to the Internet Tax Freedom Act, according to news reports and
widespread talk in Internet circles. (A spokesman said Monday that no
amendment had been offered by Mr. Lott.)
So take your pick: Is "taxation without representation" making a comeback,
courtesy of the Internet? Or is a dedicated foe of Network Solutions using the
fact that Congress didn't dot the i's and cross the t's in giving orders to an
agency to endanger the Internet's development? Either way, we're in for some
interesting cyberspace debates that the Founding Fathers could never have
foreseen when they launched their own tax revolution more than 200 years
ago. |
