NetChoice Names 10 'Worst' Internet Laws of 2010

Advocacy organization holds its annual roast of state and federal Internet laws, taking aim at a federal bill that could lead to tough requirements for online marketers, and new state efforts to collect sales tax from online retailers.

By Kenneth Corbin | Posted Feb 18, 2010
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NetChoice, a technology trade group that advocates for hands-off Internet policies, has issued its latest list of the 10 most objectionable federal and state legislative proposals, taking particular aim at efforts to restrict online marketing activities and expand the collection of sales taxes on e-commerce transactions.

Topping NetChoice's "iAwful" list is the financial reform bill recently passed by the House, the first time the group has awarded the dubious top honor to a federal bill.

NetChoice is lobbying against the Wall Street and Consumer Protection Act not so much for the financial safeguards that are its main thrust, but for a provision that would give the Federal Trade Commission the ability to move more quickly to enact regulations—a power that could result in sweeping restrictions on Internet marketers.

"Somehow in there is also a set of reforms and changes to the way the Federal Trade Commission conducts itself," NetChoice Executive Director Steve DelBianco said during a conference call with reporters.

The FTC has an ongoing proceeding examining online data collection, looking at ways Internet marketers gather information about consumers and the possible privacy hazards that may be involved.

DelBianco noted that senior officials at the commission, including Chairman Jon Leibowitz, have made comments indicating their intent to take a more aggressive position on online privacy, inviting concerns that the agency, if given greater rule-making flexibility under the House bill, would move quickly to require online marketers to obtain permission from consumers before collecting any types of information about the Web sites they visit.

"The opt-in discussion is usually centered around sensitive information," DelBianco said. "Our concern is the non-sensitive data."

Moving to a universal opt-in regime, DelBianco warned, would dramatically reduce the amount of information marketers can collect about users' Internet activities, effectively undermining their ability to tailor ads to people's preferences except in the rare instances when users affirmatively opted in to a data-collection prompt. Since advertising subsidizes so much of the material on the Internet, stripping away sites' ability to target ads would likely result in a dramatic reduction in the free content available on the Web.

Under the House bill, the FTC would be freed from a procedural requirement implemented in 1975 that requires an extensive notice and public comment period before enacting new rules. For NetChoice, that raises the concern that the FTC could fast-track online privacy rules and narrow the options for opponents to mount a legal challenge.

Of course, legislation is brewing in the House taking more direct aim at online data collection, which will likely inspire staunch opposition from NetChoice and other critics of comprehensive privacy legislation.

The return of the 'Amazon tax'

Grouped together as second on NetChoice's iAwful list are six state-level proposals that would require certain online retailers to collect sales taxes, even if they don't have physical operations in the state.

The bills, under consideration in Colorado, Illinois, Maryland, New Mexico, Virginia and Vermont, would subject online retailers such as Amazon (NASDAQ: AMZN) and Overstock (NASDAQ: OSTK) to the sales-tax collection requirement for the use of in-state affiliates, or Web site owners who place ads on their sites in exchange for a commission of any sales generated by the referrals.

Under the bills, the non-employee affiliates would impose the same tax-collection responsibility on the retailer as a sale representative or other employee based in the state.

"They're a somewhat clever but overreaching attempt to say that an out-of-state business that uses in-state affiliates to bring traffic to its site is effectively using agents to bring traffic to its site," DelBianco said.

New York set in motion the push toward affiliate tax requirements in 2008, when a controversial provision quickly dubbed the "Amazon tax" was passed with the state budget.

Amazon sued, but began collecting taxes on purchases in New York under protest. Its legal challenge is still working its way through the courts. The issue turns on a 1992 U.S. Supreme Court decision that ruled that only businesses with a "physical presence" in a state could be held responsible for collecting sales taxes there. Under the new laws, retailers' affiliates constitute a physical presence sufficient to establish a tax nexus.

In North Carolina and Rhode Island, Amazon and Overstock have terminated their affiliate programs, and threatened to do so in other states that are mulling similar measures.

DelBianco called affiliate tax laws "all pain, no gain," as the states that have implemented the provisions say they have failed to bring in as much revenue as they expected, while small, in-state businesses take a hit when Internet giants sever their affiliate agreements.

The laws in question are not creating new taxes. Online purchases are already subject to taxation even in states where the retailer does not have a physical presence. Residents are required to report untaxed Internet transactions on their state returns and remit a use tax, but in practice few residents do so and the taxes go largely uncollected.

The affiliate taxes seek to shift the burden of collection from the states to the online retailers, though with the biggest merchants threatening to pull the plug on their affiliate programs, DelBianco argued that the proposed laws are self-defeating.

NetChoice's top 10 list is peppered with several other state measures dealing with Internet tax issues, as well as a New Jersey bill that would require social-networking site operators to investigate allegations of harassment, a responsibility the group says more appropriately rests with law enforcement.

NetChoice is also targeting data-breach notification bills in Illinois and Mississippi, which it warns set the bar too low, and would require business to alert consumers to incidents that carry no material risk.

Kenneth Corbin is an associate editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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