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Declan McCullagh

Staff Writer, CNET

Internet users may soon be required to pay an additional annual fee for each domain name they own, thanks to a virtually unnoticed requirement that will begin to take effect next year.

The Internet Corporation for Assigned Names and Numbers (ICANN), the international organization that oversees domain names, is moving forward with a 75-cent annual fee for .net domains starting next year and is expected to expand the levy to other generic suffixes such as .com and .biz in the future.

A small but growing number of critics, however, charge the proposal amounts to a surreptitious tax that will allow ICANN to expand its budget with minimal oversight and divert the money to projects of dubious merit. When the fee takes effect with .net, domain name owners will pay an additional $4 million a year, a figure that would leap to more than $34 million if the fee is extended to .com and other popular top-level domains. That’s far more than ICANN’s annual budget.

“The fee idea is the worst thing I’ve heard since Bill 602P, the e-mail taxing plan from Canada. And at least that was fictitious,” said James Gattuso, a fellow at the Heritage Foundation, an influential conservative organization in Washington, D.C. At the very least, Gattuso said, domain name fees should be decided “by an outside authority, not ICANN itself.”

The forthcoming requirement from ICANN is striking because the organization had proposed a $1 annual tax on domain names five years ago and was soundly rebuked by politicians and conservative activists. In addition, President Bush and Congress signaled their distaste for online taxation by enacting a moratorium earlier this month curbing taxes on Internet access.

The 75-cent annual charge would not be the first that’s payable to ICANN; the group recently imposed a 25-cent annual charge on .com, .net, .org, .biz, .info, and .name domains. With the forthcoming .net charge, ICANN’s cut of those domain name registrations would increase to $1 a year. (About 46 million domain names are registered that end in the six most popular suffixes, according to Domain Intelligence.)

ICANN defends the new levy as a way to expand and stabilize its annual budget, which was thrown into turmoil when scores of domain name registrars banded together this year to protest a near-doubling of the organization’s spending. Targeting domain name owners may result in less organized opposition, ICANN seems to have concluded.

In a document released Friday, ICANN said that funds collected from the new domain name levy will be carved into three slices. One-third of the money will go to “developing country stakeholders,” one-third will “facilitate the security and stability” of the Internet’s naming system, while the remainder can be spent freely by ICANN without restriction.

Currently about 75 percent of ICANN’s $15.8 million budget comes from domain name registrars such as and that pay fixed annual fees. In a response to last summer’s budgetary outcry from registrars, ICANN is hoping to increase money it collects from so-called registries, which are individual companies that maintain the master database for each global domain name suffix. The 75-cent fee would be levied on registries, but as a per-domain charge instead of a flat rate.

“We have to spread out our sources of funding…This is one way to make our source of funding more stable.”

— Kurt Pritz, vice president, ICANN

“The intent of the fee is to ease the burden of (registrars) paying a higher percentage of the fees in the long run,” said Kurt Pritz, ICANN’s vice president for business operations. “We have to spread out our sources of funding…This is one way to make our source of funding more stable.”

Because VeriSign’s contract to operate the master database for the .net top-level domain expires in June 2005, ICANN took the opportunity to insert the 75-cent fee in the bidding process that solicits proposals to run the .net database in the future.

Sonia Arrison, director of technology policy at the free-market Pacific Research Institute, slammed the concept, saying: “These guys don’t need any more power. They’re already unaccountable.”

Susan Crawford, a professor at Cardoza School of Law, said she believes that ICANN is searching for additional sources of funding in its power struggle with the International Telecommunications Union, a United Nations agency that’s seeking to expand its authority over how the Internet is run.

“ICANN hopes to extend (the fee) to all generic top-level domains when they come up for renewal in years to come,” Crawford said. “ICANN has enormous power at exactly these moments. It’s nonnegotiable.”

VeriSign’s contract to operate the master database for .com expires in November 2007, which offers ICANN an opportunity to try to insert the requirement during the renewal process. ICANN’s Pritz declined to comment, saying “it’s not appropriate at this stage of the game to speculate about the .com” process.

Shifting sources of revenue
Under its existing agreement with ICANN, VeriSign is permitted to charge resellers $6 for each .com or .net name, a condition that effectively imposes a price floor for each domain. GoDaddy charges $8.95 for a .com or .net domain, for example, while Yahoo Domains will sell the first domain a customer purchases for $4.98 and the remainder for $9.95. Other suffixes with lower price floors are cheaper: The market price for a .biz domain is around $5.

When the bidding to run .net is complete a few months from now, the winning bidder is expected to come up with an annual per-domain charge that’s under $6. Even with the additional 75-cent fee imposed, ICANN estimates, consumers will pay less than they do today–though critics argue that domain name owners would save even more money if ICANN didn’t levy a new tax.

“The way they’re going about implementing this tax is sneaky,” said Arrison of the Pacific Research Institute. “But it’s more than that. It’s devious. People won’t necessarily notice because if the price goes down, who will complain? It’s cause for worry that it’s being done in such a careful way.”

Crawford, the Cardoza law professor, says the problem stems from unaccountability. “The U.S. Department of Commerce doesn’t want to appear to be delegating ICANN any power, so as a result it’s not exercising any oversight authority. So ICANN is effectively responsible to no one.”

“The way they’re going about implementing this tax is sneaky.”

–Sonia Arrison, director of technology, Pacific Research Institute

VeriSign, which currently has the contract to run the master .com and .net databases, broadly endorses the 75-cent fee. Tom Galvin, a VeriSign vice president, said his company is “supportive of the idea of a development fund” of the sort that ICANN wants to create through domain name levies.

It could “better the Internet either by improving the stability and security of the Internet or helping with best practices or helping to move Internet development into other regions,” Galvin said. “There are a lot of ways to do that. The fee is one of them.”

According to the limited information that ICANN has made available, the fund in part will effectively transfer money from people in developed countries that use .net and similar domains to less-developed countries in Africa and South America. The fund will “enable further participation in the ICANN mission by developing country stakeholders,” ICANN says, perhaps by paying travel costs so representatives from those nations can attend ICANN meetings.

The Commerce Department, which has some oversight authority over ICANN, said that the 75-cent fee “appears to be consistent” with the Bush administration’s earlier request that ICANN broaden its funding base. That request says that ICANN should “secure the necessary financial and personnel resources critical to long-term sustainability of the organization.”

In 1999, when ICANN had proposed a $1 annual fee for each domain name, the Clinton administration shot it down. Andrew Pincus, general counsel for the Commerce Department at the time, wrote that “ICANN should eliminate the $1 per-year per domain name registration user fee.”

“The world was very different five or more years ago,” said Clyde Ensslin, a spokesman for the Commerce Department’s National Telecommunications and Information Administration.

Tim Ruiz, vice president for domain services at GoDaddy, said: “We don’t really have a position” on the 75-cent annual fee for .net. GoDaddy says its customers have registered more than 5.3 million domains.

Ruiz said he would be concerned if the fee were extended to other domains and ICANN’s budget continued to balloon unchecked. It nearly doubled, from $8.3 million to $15.8 million, for the fiscal year ending in June 2005. “But that’s making a lot of assumptions,” Ruiz said.