A federal judge has ruled that a government fund with more than $50 million collected from domain name registrants is an illegal tax because it was never approved by Congress.
U.S. District Judge Thomas Hogan yesterday ruled in favor of a group of registrants who called the tax "a license to steal" and sued Network Solutions(NSOL) and the government. Network Solutions has collected the fee--$15 per year--from millions of registrants on behalf of the National Science Foundation since 1995.
"Congress may have intended to grant NSF the authority to collect the assessment, but it has not yet done so," Hogan wrote.
"It still retains the power to ratify the collection; even at this late date," he added. "However, if it wishes to effect such a ratification and permit NSF to use the Intellectual Infrastructure Fund, Congress must pass legislation that more explicitly conveys its intentions."
The National Science Foundation is the government body that oversees the domain name system. Network Solutions has a contract with NSF to register names within the most popular top-level domains, such as ".com," ".net," and ".org."
The court is reserving judgment on damages until it is decided whether the plaintiffs will be awarded the class-action status they have requested. NSF could be ordered to give refunds to all Net domain name owners who registered sites with Network Solutions.
"Plaintiffs may be entitled to a refund of the taxes that they have paid," Hogan said. "There is, however, a material question of fact as to the extent of the refund. Among other issues, it is unclear how much money the intellectual infrastructure contains."
It was also unclear how the ruling would affect a portion of the money--$23 million--set aside by Congress for the Next Generation Internet project, an effort to build a high-speed network that was begun by a consortium of universities and then adopted by the White House.
The infrastructure fund was created in 1995 "to offset government funding for the preservation and enhancement of the intellectual infrastructure of the Internet," according to NSF.
In February, Hogan issued an order that temporarily froze the fund. And in March, Network Solutions stopped collecting the registration fee.
Domain name registrants, represented by Washington attorney William Bode, filed the lawsuit in October, claiming that the preservation fee is an unconstitutional tax.
The plaintiffs also argued that NSI's deal with NSF gave the company an illegal monopoly on registration for the major top-level domains, such as ".com". The judge dismissed that part of the complaint.
"On the face, we're pleased with the results," said Cheryl Regan, spokeswoman for Network Solutions. "He did judge the fund as an illegal tax. The other nine counts were dismissed."
Hogan also rejected the plaintiffs' requests that he appoint a special master in the case; that he order the General Accounting Office to perform an audit of Network Solutions; and that he require the firm to return all intellectual property to NSF when their agreement is terminated.
Despite losing on most counts, the plaintiffs applauded the decision. It will take up to six months for a ruling on the class-action status of the case.
"The court will be asked to certify a class that includes all Internet domain name registrants that have paid registration or renewal fees," Bode said in a statement. "When the class is certified, we will ask the court for restitution."