Adduci, Mastriani & Schaumberg LLP

Navigating the Sea of E-Business Regulation March, 2000)

Published in Global eCommerce Law and Business Report (March 2000)

While the Internet may be viewed as “borderless,” Internet commercial transactions are not. E-businesses must be aware of multi-national requirements of their transactions and tailor their business accordingly. Despite international agreements such as WTO/GATS (General Agreement on Trade in Services) and WIPO, and national agreements such as the Internet Tax Freedom Act, e-businesses are operating in a fragmented regulatory environment. As a customer sails from Peru to France and throughout the United States with a mere click of a mouse, the regulation facing e-business mounts as each digital border is crossed. Individual states in America, independent nations in Europe, and countries around the world are each beginning to pass their own Internet legislation to protect their citizens and regulate e-business within their borders.

Multi-national regulation is evolving at Internet speed, particularly in electronic contract formation and taxation, two key areas affecting e-businesses. However, the regulation does not always require the same things from e-businesses. Inconsistent state, national and international regulations can apply to a single transaction. Deciphering and applying these varying global requirements to conduct e-business is both difficult and time-consuming. Expertise in intellectual property, the Internet, and international trade are crucial skills that e-businesses need to wade through in Internet regulation.

International E-Business

The requirements for electronic contract formation, the very bedrock of e-businesses, exemplify the legal diversity of cyberspace. By offering goods for sale on the Internet, an e-business potentially subjects itself to conflicting regulations. For example, L.L. Bean’s electronic contract for ordering a snow parka from its Internet site may be enforced differently depending on where the transaction takes place. In the United Kingdom, subject to a few exceptions, there is no law against contracts being formed electronically. France, however, requires that if one is a non-trader (defined by French law), the contracts must have written proof. Italy requires a “hard copy” of a document (to the exclusion of electronic versions) to be produced in some instances to enforce contractual rights. In Ireland, the hearsay rule may exclude some electronic contracts unless they fall within a few specific exceptions. Australia and Colombia have recently proposed drafts of e-commerce requirements for their markets as well.

The trend is evident: countries are swiftly passing e-business legislation, signified by the European Union’s (“EU”) naming accelerating e-commerce as one of its ten key action points in December of 1999. However, even though the EU is aiming to pass uniform legislation throughout Europe, EU directives become effective through national legal systems. Differences materialize in implementation and interpretation in each country. Further, in limited circumstances, a country can be granted an exemption from compliance with EU directives. Thus, a harmonized global approach to e-business is not likely in the near future. E-businesses are going to be forced to stay abreast of varying multi-national regulation. They can steer clear of legal pitfalls caused by inconsistent regulation by knowing what the relevant requirements, exceptions, and options are for conducting business in a particular market. Once local requirements are known, knowledgeable and careful contract drafting specific to individual countries can help e-businesses avoid many problems.

E-Business in the U.S.

Avoiding international transactions will not eliminate the regulatory burden facing e-businesses. Even if one could limit one’s e-business to the United States, differing regulations within the United States will still challenge e-businesses. The laws that govern contract formation were drafted long before the Internet. Applying those existing rules broadly, electronic contracts require: (a) a means for authenticating the identity of the contracting parties; (b) a legally recognized form of signature; and (c) secure and reliable commercial records. As each state begins to pass Internet legislation to fill in the legal gap between paper and electronic contracts, contract formation will be governed by varying local laws.

For example, Georgia has passed its own version of an Internet law. According to its critics, it criminalizes the use of an e-mail address that includes any other name other than the mailbox owner, as well as using domain names and hyperlinks on a Web page without first getting permission from the owner of any included trademark, trade name, logo, legal or official seal, or copyrighted symbol. Besides exposing an e-business to liability, this law could potentially invalidate a contract when a customer uses an “alias” e-mail address or if an e-business includes an unauthorized link on its Web site, since such use could be grounds for a criminal cause of action.

California also has passed its own laws on digital signatures, on-line privacy, and Internet sales, all of which affect how e-businesses can form contracts. In fact, the state’s Electronic Commerce Advisory Council issued a report that makes a plea for more legal measures to be adopted. Utah, too, has its own requirements for digital signatures, with the intent of creating an infrastructure to support digital authorization. With more state legislation pending, national e-businesses will be exposed to more and more sets of regulation. Thus, e-businesses will need to plot a course through regulation to control liability and comply with business requirements.

Tax Regulation

Amid the murky waters of inconsistent international and domestic Internet regulation, e-businesses must also negotiate conflicting state, national, and international tax regulations. Particularly, in seeking to maximize their potential profits, e-businesses must become cognizant of the high tolls that federal, state and international regulators are trying to levy on these new digital trade routes. Although the Internet Tax Freedom Act guarantees freedom from new multiple or discriminatory taxes on electronic commerce through at least October of 2001 [A notable exception to this blanket protection involves state imposed sales or use taxes that are non-discriminatory in nature, i.e., that apply equally (to the same people, at the same rate) to goods, services or information sold on the Internet as they would apply to similar property sold otherwise. Thus, many states have imposed, and continue to collect taxes on sales of goods and even software distributed over the Internet.], not all governments nor all people share the desire to preserve this freedom.

While Senator John McCain (R-AZ) and Representative John Kasich (R-OH) each have introduced bills (S-1611 and HR-3252, respectively) that would extend the moratorium on Internet taxation indefinitely, as well as ban sales and use taxes on Internet purchases, Senator Ernest Hollings (D-SC) has introduced a different plan. His bill, S-1433, would ignore the expiration of the Internet Tax Freedom Act and impose a federal tax on “the first retail sale of merchandise effected via the Internet . . . equal to 5 percent of the price. . . .” However, no definition of what constitutes “merchandise” is provided in the bill. The ramifications of this bill are wide-reaching: it could apply a federal sales tax to clothing, software, and even information. As such, it could signify a sweeping return to the notion that sales taxes in the United States are properly the province of the federal government. To the extent that the upcoming elections will have a significant impact on the form of these nascent regulations, both at the state and federal level, e-businesses will need solid business and legal planning, as well as advocates in Congress.

The “Bit-Tax”

In the international arena, the WTO, in May of 1998, declared “that Members will continue their current practice of not imposing customs duties on electronic transmissions.” This continuing policy comports with the current treatment of both phone calls and fax messages, on which no customs duties are now placed. However, the United Nations, in a July 1999 report on Human Development, floated an Internet taxation proposal calling for the imposition of a “bit-tax” on the actual units of information coursing through the Internet. This proposal, “a very small tax on the amount of data sent through the Internet,” would be used by the UN to subsidize the “global communications revolution — to ensure that it is truly global.”

The report suggests that under the proposal, 100 e-mails, each 10-kilobytes in size, would be assessed a tax of one penny. The report claims that such a tax, enacted globally, would have yielded 70 billion dollars in 1996. However, the report does not identify how this yield is affected by the substantial cost of compliance that such a tax would require, namely, the exhaustive measures necessary to identify, value and collect taxes on each such electronic transaction.

Current policy strongly disfavors such a tax. International business interests, including the International Chamber of Commerce representatives from Canada, France, Germany, Japan, Mexico, the United Kingdom, among others, have gathered together under the banner of the Alliance for Global Business to offer their own version of what the Internet economy should look like. The result, A Global Action Plan for Electronic Commerce, 2d edition, was issued in October, 1999, and voices the Alliance’s opinion that “there should be no new and additional taxes, such as usage or bit taxes.” The Alliance further concludes that “WTO members should agree to continued duty-free treatment of electronic transmissions and should consider . . . to move beyond temporary commitment to a permanent one.”

Similarly, the United States has also voiced its strong opposition to such a tax. The 106th Congress has issued a concurrent resolution, known as the Global Internet Tax Freedom Act (S.Con. Res. 58 / H.Con. Res. 190), that urges “a permanent national moratorium on tariffs on electronic commerce; . . . an international ban on special multiple, and discriminatory taxation of electronic commerce and the Internet; and urges the President to oppose any proposal by any country, the United Nations, . . . to establish a bit tax on electronic transmissions.” Given that this same resolution values electronic commerce among businesses worldwide at greater than 1.3 trillion dollars by 2003, strong forces will be opposed to any attempt to sieve this tidal wave of commercial activity through a bit tax. However, as noted above, the bit tax is just the tip of the iceberg; e-businesses attempting to electronically circumnavigate the globe will have to contend with a vast number of regulations that are hidden beneath the surface of the waters.

There are many laws in the new world of Internet commerce. Much like being an early explorer, there are conflicting maps, laws and precedents about what lies beyond the horizon in e-business. Inconsistent regulation issues can sink an e-business before it even sets sail. But like yesterday’s sextants used to navigate the stars, today’s cyberspace lawyers can provide landmarks and forecast the direction that e-businesses must steer toward to achieve success.

James Adduci is a Partner in the Washington, D.C. firm of Adduci, Mastriani and Schaumberg, L.L.P. The firm specializes in international trade regulation.

Reprinted with permission from Global eCommerce Law and Business Report. Copyright 2000 WorldTrade Executive, Inc . All rights reserved.

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