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.
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.