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Testimony of
Lawrence Rudolph, General Counsel
National Science Foundation
Before the House Science Committee
Subcommittee on Basic Research
March 24, 1999
Mr. Chairman and Members of the Subcommittee, I appreciate
the opportunity to testify today and to present NSF's
views on H.R. 749, legislation that would repeal Section
8003 of the 1998 Emergency Supplemental Appropriations
Act.
As you know, Congress has long authorized and directed
NSF to support research on computer networking, including
support for the infrastructure. Over three decades
ago, Congress authorized and directed NSF "to foster
and support the development and use of computer and
other scientific and engineering methods and technologies"
[Section 3(a)(4) of the National Science Foundation
Act of 1950, as amended, 42 U.S.C. 1862(a), added
as part of the Daddario Amendments in 1968].
At the beginning of this decade, Congress assigned
the Foundation a major role in the construction of
what was then called the National Research and Education
Network and charged NSF, as part of the National High-Performance
Computing Program, with providing "computing and networking
infrastructure support for all science and engineering
disciplines" (sections 102 and 201 of the High-Performance
Computing Act of 1991, 15 U.S.C. §§5512 and 5521).
When the Internet first began, no one knew where it
would lead, or whether it would ever evolve into a
commercially viable activity. At each step along the
way, NSF relied on our in-house expertise and creative
ideas from the research community to advance the networking
infrastructure.
When the demand for second-level domain registrations
exploded during our five-year cooperative agreement
with Network Solutions, Inc. (NSI), NSF employed a
mechanism whereby beneficiaries of the domain name
registration service would pay for that service and
that a portion of the resulting fees would be used
to support the networking infrastructure. Similar
arrangements have been used in a variety of NSF-supported
research centers as well as by various other federal
agencies. NSF's use of this arrangement to put program
income to use to further the mutual benefit of researchers
and other network users was not new, it was not unique,
and, we feel, it most assuredly was not a tax.
1. The Internet Intellectual
Infrastructure Fund Is Not a Tax
Mr. Chairman, the premise of this bill is that the
30 percent of the domain name registration fee that
was deposited into the intellectual infrastructure
fund was a tax. The National Science Foundation submits
that the 30 percent fund was not a tax. The executive
branch has consistently maintained that it was not
a tax, and this legal issue remains the subject of
pending litigation. (See government's brief on appeal
in the Thomas case attached to this testimony).
Because that issue is so important to the bill under
consideration, let me take a few minutes to address
it here.
Under the decisions of the United States Supreme Court,
taxes have two principal characteristics. They are
received by the government, and they may be used for
any public purpose. [U.S. v. La Franca, 282
U.S. 568 (1931)].
The funds at issue here are neither. Rather, they are
"Program Income" -- a separate category of funds that
is not received by the government, but by entities
that receive federal financial assistance. The use
of such funds is governed by the provisions of OMB
Circular A-110. That Circular applied to the relationship
at issue in the Thomas case, between NSF and
NSI, the "awardee" under a cooperative agreement with
NSF. The 30 percent portion that went into the Internet
Intellectual Infrastructure Fund was initially to
be disbursed by NSI in accordance with guidance from
the Internet community.
As the government said in its brief, "[p]rogram Income
means gross income earned by the grantee that is directly
generated by a supported activity or earned as a result
of the grant." (Brief, p. 27). The entirety of the
registration fees charged by NSI was "for services
performed during the project period," as a result
of the cooperative agreement with NSF.
The fact that the funds in question may be used to
support the Next Generation Internet Initiative does
not make their collection an unauthorized tax for
at least two reasons. First, these funds were collected
by NSI as program income, and it is a fundamental
principle in the world of federal financial assistance
that program income, including fees for services performed,
may be added to funds committed to a project to be
used for program purposes. See Principles of Federal
Appropriations Law, 2d Ed., Vol. 2 (General Accounting
Office), Sec. 4. Second, Congress urged NSF to use
these funds to support the Next Generation Internet
Initiative in a report accompanying our FY 1998 regular
appropriations bill.
2. Origins of the Internet Intellectual
Infrastructure Fund
Let me provide some background on NSF's involvement
in this matter. Initially, NSF paid the entire cost
of Internet second-level domain name registration.
At that point, most of the registrants were educational
institutions. Commercial participation in the Internet
exploded, and by 1995 had reached a point at which
NSF's total five-year budget for that activity would
have been exhausted in another year.
That year a 16-member Mid-Term Review Panel - comprised
of members of the Internet community with no relationship
to NSF or NSI - reviewed the domain name registration
program and recommended the imposition of a domain
name registration fee. (Brief, pp. 8-9). Pursuant
to the panel's recommendations, NSI and NSF amended
the cooperative agreement to create a self-sustaining
fee-based system, and included a provision for 30%
of registration fees to be placed in a custodial account,
pending direction from an advisory group that would
be representative of the Internet community. (Brief,
pp. 9-10). By September 1997, that fund, with interest,
was approximately $35M. Congress, in the regular FY
1998 appropriation bill, directed NSF to credit $23M
from the fund to NSF's R&RA; account to be used for
the development of NGI. In October 1997, NSI transferred
$23M of the funds to NSF pursuant to that authority.
Immediately thereafter, the Plaintiffs in the Thomas
case filed suit in federal court, alleging in part
that the collection of the 30 percent of the fee constituted
an unauthorized tax.
3. History of the Thomas Litigation
and Section 8003
When the lawsuit seeking to reclaim a portion of the
registration fees was filed, the U.S. Government's
position was that the collected fees represented "program
income" -- not a tax -- and was collected in accordance
with OMB regulations. Subsequently, on April 6, 1998
Judge Thomas F. Hogan of the U.S. District Court for
the District of Columbia ruled that a portion of this
fee was a tax. At the same time, however, he invited
Congress to enact legislation that would ratify its
collection.
When Congress enacted Section 8003 in response to that
invitation, Judge Hogan dismissed the lawsuit on the
basis that Section 8003 provided sufficient and appropriate
authority for the collection of the money deposited
in the Intellectual Infrastructure Fund and NSF's
use of these funds to support Next Generation Internet
and related networking activities.
4. Congress Authorized and Directed
NSF's Treatment of the Internet Intellectual Infrastructure
Fund
On several occasions Congress stated that a portion
of the Internet domain name registration fees should
go to NSF to support computer networking activities.
First, the Senate Labor and Human Resources Committee
stated in the report (Senate Rept. 105-110) accompanying
the NSF Authorization Act of 1998 (P.L. 105-207):
In January 1993, NSF entered into a 5-year cooperative
agreement to provide domain name registration
services to Internet users. In 1995, NSF amended
the agreement to authorize the collection of fees
for registration services. Under the current agreement,
30 percent of the revenue generated from domain
name registration fees are deposited into an account
for preservation and enhancement of the Internet.
The account currently contains nearly $35 million.
The committee believes that these funds should
be utilized by the National Science Foundation,
in addition to funds otherwise appropriated to
the Foundation, in support of research and development
activities associated with the Next Generation
Internet.
Second, Congress explicitly reaffirmed NSF's position
regarding the use of a portion of the domain name
registration fee in Section 8003 of the Fiscal Year
1998 Emergency Supplemental Appropriations and Recession
Act. Section 8003(b) provided that the entire amount
in the fund should be available for NGI and related
activities. See 112 Stat. 58, 94. As the Conference
Committee Report on that legislation explained, this
"permit[ed] the NSF to proceed with the use of these
funds as intended" by our FY98 Appropriations Act.
5. The Effect of H.R. 749
HR. 749 apparently has been introduced to return us
to the point where Judge Hogan's initial ruling had
been issued, but before his invitation for a ratification
had been acted upon. Although H.R. 749 would repeal
Section 8003 of the FY 1998 Emergency Supplemental
Appropriations Act, what would follow its enactment
into law is not clear. For example, the bill does
not conclude the litigation, it simply creates additional
legal issues for the courts to decide. The bill does
not specify how the funds already collected, and for
the most part committed to building the intellectual
infrastructure, would be recovered. Nor does the bill
provide a mechanism for refunding any portion of the
fees to people who paid to register an Internet domain
name.
The potential impact of HR 749 on the Foundation's
support of science and engineering could be significant.
Consistent with congressional guidance and with the
language in our cooperative agreement with Network
Solutions, NSF has committed or obligated almost the
entire balance of the Intellectual Infrastructure
Fund for Next Generation Internet research activities.
If NSF is required to pay $62.2 million in settlement
of a claim, the Foundation would be forced to make
difficult budget decisions.
One action could be the disruption of ongoing NSF funded
NGI activities. This would be highly unusual and extremely
damaging to NSF's relationship with the performing
institutions and the individuals who won these highly
competitive awards.
In this scenario, many universities and colleges across
the nation may not gain access to cutting-edge networking
resources. Abruptly canceling high-speed access for
researchers at these institutions would severely curtail
vital cutting-edge science, engineering and education
efforts.
Mr. Chairman, the Next Generation Internet has the
potential to improve U.S. competitiveness in vital
communication markets and accelerate progress in areas
such as telemedicine, distance learning, manufacturing,
and national security. The NGI intends to develop
technologies that support interoperability of wireless
and wireline systems which has the potential to dramatically
improve the capabilities of today's Internet, as well
as support widespread deployment of NGI-developed
applications in the future.
Another unappealing action would be to reduce NSF's
budget for research and education across the board,
curtailing research activities at hundreds of institutions
nationwide. It would be particularly damaging if NSF
was required to take over $60 million out of FY 1999
budget as the result of the enactment of HR 749. Such
a reduction at this point in the fiscal year could
limit funding for research in nearly all fields of
science and engineering. Such a funding cut could
impact over 1000 individual investigators, senior
scientists, and graduate and undergraduate students.
Conclusion
Mr. Chairman, I hope that my testimony will clarify
for the committee NSF's position on HR 749 and the
reasons we oppose it. It is legislation that, under
the most optimistic of scenarios, would bring a very
small monetary refund to domain name registrants.
The cost to the government to identify, contact, and
write these checks, even if no legal fees were withheld,
would make the refunds at best, symbolic, and at worst
cost the government more money than the refund itself.
The benefits of investing this money in the nation's
networking infrastructure are, by contrast, real.
Thank you for the opportunity to testify and I look
forward to responding to any questions you might have.
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