The Voice of the eCommerce Industry

Gov Schwarzenegger Terminates Nexus Tax, Overstock Going Back to Cali

Yesterday was a big day for any business, nonprofit organization, or fundraiser that relies on affiliate advertising that depend upon Internet advertising for important revenue and fundraising efforts: Governor Schwarzenegger vetoed the nexus tax and calls up Overstock.com to invite to reinstate their affiliates in California.

As we've written previously, all sorts of organizations depend on Internet advertising. Online companies are experimenting with new ways to deliver products, services, and content, and business of all kinds are going online to reach consumers and advertise to receptive audiences. The Gov's veto sends a strong message that this growing business model is welcome in California.

It is important to note that the proposed budget legislation was indeed a tax increase. Contrary to the statements of nexus tax proponents, in no event would new money flow into California. Any incremental sales tax collected from online sellers just moves from the California purchaser to the state treasury, at a time when households are being squeezed by a struggling economy. The result: fewer advertising dollars would flow to California publishers and websites who employ and serve California’s residents today.

And this is one tax increase that would have serious unintended consequences. An affiliate advertising tax would harm California businesses, nonprofit organizations, and even public schools that depend upon Internet advertising for important revenue and fundraising efforts.

Slam Dunk WSJ Editorial on Internet Taxes

Check out today's Wall Street Journal editorial on the affiliate nexus tax that North Carolina is considering -- aptly titled Tarheels vs. the Internet. This comes on the heels (pun intended) of news that Amazon will terminate its affiliates in North Carolina.  It also talks about the tickets tax, which is blatantly in violation of the Internet Tax Freedom Act because it only applies to the Internet resale of tickets.

-Braden Cox

Pausing for Breath on a Didgeridoo

The didgeridoo performance that kicked off this week's ICANN meeting in Sydney prompted Chairman Peter Dengate Thrush to marvel at how the player produced a continuous sound without pausing for breath. The didgeridoo could become the official instrument at ICANN, which pushes ever forward with its plans, often without pausing to respond to the legitimate concerns of stakeholders.  

ICANN has a lot on its plate this week -- the upcoming expiration of its formative agreement with the U.S. Government, the introduction of hundreds of new top-level domains (TLDs), internationalized TLDs, and internal restructuring, just to name a few. 

What's concerning is that with such a loaded agenda, ICANN seems to be succumbing to an artificial sense of urgency, trying to mow through complex, challenging policy changes without taking the time needed to get the policy right.

One example of this trend was Monday’s discussion of vertical integration among registries and registrars. It's a complicated issue, and one that could have serious ramifications for all Internet users, as I tried to point out in my comments:

Allowing registries (wholesalers) to be owned by registrars (retailers) and vice versa may have some beneficial effects for the market, but also may have severe unintended consequences for Internet users in the business community and elsewhere.

The economists brought in by ICANN talked about market power problems with exclusive or preferential vertical contracts.  But registrants are also impacted by old fashioned spite and rivalry, if it compromises market performance.  For instance, some registrars choose not to sell some TLD domains because they don’t want to enrich a competing registrar who’s running the TLD registry.

This isn't just hypothetical concern -- it's happening today with the dot me TLD. .me is a GoDaddy project, so some rival registrars don’t even show .me as an available TLD.  If I’m a registrant in .me, or trying to build a social network around .me domains, I lose when inter-registrar rivalries suppress registrations (and traffic) in the TLD.  

The complexity and lack of consensus on the issue was illustrated by the free-flowing (and long-running) debate that followed the discussion, but the buzz in the hallways is that ICANN is in a hurry to make a final determination on this issue to clear the way for the introduction of new top-level domains.

Unfortunately, that buzz is a familiar tune, since ICANN often deems that meeting its own deadlines is more important than achieving real consensus on serious issues.

As much as we enjoy the continuous sound of the instrument, it may be time for the organization to stop and take a breath.

--Steve DelBianco

Amazon Threatens to Leave the Affiliate Tax Jungle in North Carolina

Welcome to the jungle
We take it day by day
If you want it you're gonna bleed
But it's the price you pay

Amazon.com announced yesterday that it won't be paying the price of affiliate advertising in North Carolina if the state uses it to assert nexus for sales tax collection. It will stop using affiliates in the Tar Heel state, which is what Overstock did in New York when the state was considering the affiliate nexus approach.

States are wrong-headed when it comes to asserting tax nexus just because some companies use a web-based network of affiliates to help advertise their products. As I've discussed before, affiliates are more akin to in-state advertisers, not sales reps.  

Furthermore, states that pass these affiliate nexus bills really end up hurting in-state companies that rely on Internet advertising.  At a time when companies are struggling for ways to make money on the Internet, we think now is a particularly bad time to tax Internet marketing.  

North Carolina's affiliate nexus tax proposal is #4 on the NetChoice iAwful list of bad legislation. We think it should stay out of the affiliate tax jungle. It's constitutionally messy, bad policy...and as Guns 'N Roses mildly stated, it' gonna bring you down- huh!

-Braden Cox

Louisiana Bill Taxes Internet Access Despite Federal Moratorium

There's a hearing going on as I write on a Louisiana bill (HB 569) that would create a new tax on the Internet bills of consumers, despite the fact that there's a federal moratorium prohibiting it.

We just heard Attorney General James D. "Buddy" Caldwell say that this isn't a "tax", it's a "fee."  Louisiana is taking an interesting approach – HB 569 would impose a tax of 15 cents per month on ISP subscribers that would go to preventing and prosecuting Internet-based crimes against children.  AG Caldwell claims that it is merely a “usage fee” -- the price we pay for using the Internet.

But the Internet Tax Freedom Act explicitly sought to prevent the imposition of a tax that simply used different terminology. The Act defines a tax as:

(i) any charge imposed by any governmental entity for the purpose of generating revenues for governmental purposes, and is not a fee imposed for a specific privilege, service, or benefit conferred; or
(ii) the imposition on a seller of an obligation to collect and to remit to a governmental entity any sales or use tax imposed on a buyer by a governmental entity.

Under this definition, a charge on Internet access is not like a fee imposed for recording a mortgage, for example. When you pay a recording fee, you pay for the costs you impose on the government for handling your transaction. If you were to pay a "usage fee" for law enforcement to deal with online safety, you're paying for general services, something that law enforcement/government should be doing anyway to protect the public.

States are cash-strapped right now. Louisiana is pursuing a worthy goal of trying to provide more resources for law enforcement for Internet safety. Taxing the Internet is just the wrong way to do it.

If Louisiana’s  law enforcement/criminal justice system needs more resources to pursue and control criminals, the state shouldn’t hesitate to re-allocate its revenue or even raise the taxes that already fund those efforts.  It’s absurd to tax ONLY Internet users when child predators do nearly all their evil in the physical world of school playgrounds and hotel rooms. Under the logic of the bill's proponents, we should also be adding to the hotel tax, or to the cell phone tax since conversations occur on cell phones.

UPDATE:  The bill was deferred by committee vote. This usually means that the bill is dead for the session.  

-Braden Cox

Artificial Deadlines, Real Consequences

Executives of the Internet Corporation for Assigned Names and Numbers (ICANN) have been keeping the airlines in business this year, flying to the far corners of the globe to enlist support for ending a key relationship with the U.S. Government this September. It seems the question of ICANN's readiness has taken a backseat to the imperative of meeting this hard-and-fast deadline.

But for the business community and everyone else who relies on a stable, secure Internet addressing system, the key concern is whether the ICANN "transition" will preserve the safety and security of the system, not whether it will occur by an arbitrary date. I said as much in my comments to the National Telecommunications and Information Administration on its Joint Project Agreement (JPA) with ICANN.

One thing is clear: most of the people involved in the ICANN process support the idea of ICANN transitioning into a fully private-sector-led entity with a narrow scope and robust accountability mechanisms.  (see all comments)

But attempting that transition before ICANN is fully equipped to stand on its own would be dangerously and unnecessarily destabilizing. Yet that's exactly what ICANN is trying to do, all in order to shed the JPA by September 2009.

What makes this particularly troubling is that ICANN knows what it needs to do in order to achieve the stability and accountability the community has been demanding.   Terms may differ, but a broad cross-section of ICANN participants have called for:

• Accountability - specifically a mechanism that would make ICANN accountable to some entity other than itself.
• Protection against capture - by foreign governments, cartels or bureaucracies seeking to impose greater governmental control.

The irony of ICANN's fervent push to end the JPA is that community support for the JPA stems mainly from the belief that it is the only thing that currently addresses those organizational needs. 

As I mentioned in a previous post, the JPA has clearly prevented aggressive governments and government bureaucracies from mounting a full-scale assault against ICANN. The JPA has also introduced a measure of accountability into the process, by requiring ICANN to justify its decisions to the U.S. Government.

The JPA is hardly perfect, but until we come up with something better, it's our best bet to preserve private sector leadership of ICANN. 

--Steve DelBianco

NRF Peddles Organized Retail Crime Survey; We’re Not Buying

Yesterday, the National Retail Federation came out with its annual Organized Retail Crime survey of big box retailers. Once again, it’s a monument to the old adage about “lies, damn lies, and statistics.”This one’s our favorite – straight from the study:

“According to the survey, one-third of retailers believe that more than 50 percent of “new in box” merchandise sold through online auction sites is stolen or fraudulently obtained”

Think about this – the NRF asked its members, who are big box retailers that view online marketplaces as the competition, to guess what percentage of new in-box goods are stolen. Their responses are biased beyond belief and backed with zero evidence or analysis. And despite the retailers’ belief that most goods online are stolen, they reported a big drop in the number who have identified stolen goods sold online.

Other thoughts we had in response to the NRF “study”:

·     Despite retailers’ claims that theft is getting worse, nearly 6 in 10 retailers say they now spend less on loss prevention compared to last year. Yet while cutting spending on loss prevention, these same retailers doubled their spending on lobbying over the last three years, according to the Center for Responsive Politics. And they are lobbying for new laws to restrict competition from online sellers.

·     A leading loss prevention consultant told retailers that over 2/3 of all store shrink is preventable, mostly by improving business practices, according to Larry Miller, Director of National Retail Research Group.

·     Retail theft is not being caused by the Internet. According to the NRF’s survey, retailers don’t identify stolen goods online any more than in traditional places like street corners, swap meets, and pawn shops.

·    The NRF says that criminals use online marketplaces because they are anonymous, but these sites know exactly who the seller is, and disclose all that data to law enforcement officials whenever they ask.  The truth is, an online auction is the last place a criminal would try to hide the sale of stolen goods.

·     The NRF claims that online sellers “threaten the health and safety of innocent consumers”, yet Rite Aid, CVS, Target, and Walgreens have paid millions in fines for selling expired products—often by putting stickers over the expiration dates.

·     Overall, there is no evidence that organized retail crime has actually gone up — the study only asks retailers whether they think it has increased. And that perception has only increased over the last two years — concurrent with the worst economic downturn since the Great Depression. Isn’t it much more likely that any increase in store theft may be a result of employees and consumers desperate to make ends meet?

As we’ve said again and again, while the NRF likes to say that they are concerned with loss prevention, we believe this is really about competition prevention. They’ve gone so far as to paint millions of hard-working Americans who’ve sold goods online as drug-addicted criminals.

And the NRF has lobbied hard for federal  legislation that would let any retailer force online marketplaces to interrogate their sellers about how they legally acquired the stuff they’re selling.  Big-box retailers want this information so they can stop their suppliers from helping small online competitors offer discount prices to shoppers around the country.  

Just this week, we included the NRF’s preferred federal legislation on our iAWFUL tally of the worst proposed Internet laws in America.

As the battle over organized retail crime heats up in Congress, we’ll be watching and acting to shine the spotlight on the NRF’s anti-competitive tactics. 

Steve DelBianco

Preserving Resale Rights and Promoting Transparency for Event Tickets

Recent developments have the events ticket market going paperless (tickets) and creating a paper trail (via proposed legislation).

First, there's Ticketmaster's efforts to push "paperless tickets" into greater use. On Monday the Wall Street Journal reported on how the upcoming Miley Cyrus (aka Hannah Montana) tour will sell only paperless tickets.

I've previously blogged about paperless tickets here, here and here and continue to maintain that they are not about consumer convenience. Why? Well, at the venue you have to present the credit card used to purchase the tickets, which means everybody in your party has to arrive at the same time. And if you can't go you won't be able to resell your tickets or even give them away. Ticketmaster won't give you a refund, that's for sure!

With paperless tickets, Ticketmaster says it is trying to stop scalping, but why? As yesterday's Los Angeles Times opinion piece cogently argues:

Secondary markets are important. They help overcome the inefficiencies in primary markets, while giving purchasers a safety net. If "paperless" tickets are the only option for consumers, there will be no secondary market unless Ticketmaster provides one. That's quite a power grab for a company that's awaiting the Justice Department's approval for a blockbuster merger (with Live Nation, the country's leading concert promoter).

The reality is that Ticketmaster knows that secondary markets are important, which is why it owns TicketExchange. It's common practice nowadays for artists to bypass the box office. According to a Wall Street Journal article from a few months ago:

Virtually every major concert tour today involves some official tickets that are priced and sold as if they were offered for resale by fans or brokers, but that are set aside by the artists and promoters, according to a number of people involved in the sales.

Understanding how all this works and how many tickets are actually available is difficult. But it's important, given the rhetoric we often hear from legislators and "consumer advocates" that would restrict and cap prices on ticket reselling. Which is why a bill introduced last week by Congressman Pascrell (HR 2669 -- "Better Oversight of Secondary Sales and Accountability in Concert Ticket Act of 2009") may actually be helpful even if it micromanages distribution and disclosure rules.

Among other things, this bill requires primary ticket sellers to reveal the number of total tickets offered for sale and the percentage going to the general public. This would give the market more information, which would allow consumers to better determine appropriate prices. However, the bill imposes some burdens on the secondary market, such as forcing secondary ticket sellers to register with the FTC and imposing a blackout period where resellers could not buy tickets until 48 hours after the initial ticket sale.

Perhaps what this all gets down to is the issue of consumer access. Access to information and access to tickets on both the primary and secondary markets. To the extent that paperless tickets restrict access, then this is a bad thing.  

-Braden Cox

Nothing Nice on This List -- Introducing iAWFUL, a NetChoice Initiative

Some of the biggest threats to the Internet have always come from well-meaning lawmakers looking to "fix" it. And lately, there’s been a whole lot of fixin’ efforts going on.

At NetChoice, we've always been committed to challenging legislation that threatens our vibrant industry. Today more than ever, we need a more unified and systemic approach to combat bad legislation.

That's why we've created iAWFUL, the Internet Advocates Watchlist for Ugly Laws. 

iAWFUL identifies America's 10 worst legislative and regulatory proposals targeted at the Internet. Through iAWFUL, NetChoice will urge citizens to join the fight to defeat bills and proposals that threaten the future of ecommerce and online communication. The list will be continually updated to reflect the most immediate dangers, based on regulatory severity and likelihood of passage.

While misguided Internet legislation is nothing new, the threat that such legislation poses has increased dramatically. The latest breed of legislative proposals are among the most restrictive we've ever seen; they can crop up anywhere, as state lawmakers increasingly take the lead; and they threaten an Internet that increasingly lies at the heart of global commerce and communications.

State-based legislative efforts account for the majority of entries on iAWFUL, a stark indication of the growing push in statehouses to regulate and tax nearly every aspect of online behavior.

Topping the inaugural iAWFUL list is New Jersey's Social Networking Bill (A 3757), which would require the operators of social networking sites to aggressively police their users. In addition to stifling the free exchange of information and communication on social networking sites, the proposed bill would impose a massive burden -- particularly on smaller, upcoming services that lack the resources to take on such an unnecessary and invasive task.

We encourage anybody who cares about the Internet, really to head on over to the iAWFUL site, check the full list, suggest laws that should be included, and join the fight to uphold innovation and Internet freedom. 

If the ICANN JPA Doesn't Matter, Why Are So Many People Trying to Kill It?

ICANN's President Paul Twomey was up before Congress today, making his case for why the Joint Project Agreement (JPA) between the US Commerce Department and ICANN should be allowed to expire in September. Among his reasons: the JPA doesn't matter and if it goes away, "nothing will change" in the relationship between the U.S. Government and ICANN.

If that's really true, Mr. Twomey should probably tell the governments of Russia and Brazil, the European Union, the International Telecommunications Union and the slew of other foreign and intergovernmental entities that have mounted a concerted campaign to terminate the agreement.

The JPA is the U.S. Government's main tool for communicating concerns and guidance to ICANN (which was created by US government to transition management of the Internet to the private sector) Twomey is correct when he says that the agreement is short (just two pages) and contains little in the way of binding language, but the JPA also sets goals for ICANN to work toward, and provides ways to review and assess that progress.

For those that seek to impose greater governmental control over ICANN, the JPA is seen as a major obstacle. They've devoted significant resources to making sure it goes away in September of this year.

The United Nations wants the JPA gone so it can exert more muscle over Internet governance.  And the European Commission just proposed a new “G-12 for the Internet” to replace US government oversight when the JPA expires.  

Seems to me that the JPA is a kind of Star Trek shield that protects ICANN from capture by governments.  Captain Kirk wouldn’t shut down his shields just when the enemy draws near, and neither should ICANN.

Mr. Twomey can't have it both ways. If the JPA doesn't actually matter, neither he nor the global Internet community should care whether it is extended. And if it does matter, he needs to come clean with Congress and the Internet community about risks we face when the JPA goes away.