Advisory Commission on Electronic Commerce

Advisory Commission on Electronic Commerce

September 14, 1999

Advisory Commission on Electronic Commerce September 14-15, 1999 New York, New York

Executive Summary Statement of Frances B. Smith Executive Director, Consumer Alert September 9, 1999

I am pleased to participate in the panel on local, state and federal tax issues associated with electronic commerce before the Advisory Commission on Electronic Commerce. In my comments, I will discuss several issues relating to taxation of Internet transactions. In an appendix to my statement, I also present Consumer Alert’s position on other aspects of electronic commerce relating to consumers. My views are from the perspective of a consumer group that promotes consumer choice, competition, and the development of technology that can lower prices, increase convenience, and bring significant benefits to consumers across economic and geographical lines.

Introduction As a consumer group, we appreciate the enormous consumer benefits that access to Internet services brings – for example, the ability to communicate with relatives, friends and acquaintances across the globe, to reach others who may have similar health problems and share information about resources available, to access information sources in countless subject areas at the click of a mouse, to comparison shop in one’s home at any time for a multitude of goods and services offered around the world and to immediately order those that meet one’s needs.

Such services are unique for one medium to offer, and the very uniqueness and complexity of the Internet causes great support on the one hand and great fear on the other. Consumer Alert would caution the Commission not to bow to those who would constrain the future growth and expansion of this medium in the name of “the public good” by shackling electronic commerce with onerous regulation or with a new system of taxation that could stifle its growth. Consumers already benefit greatly and stand to see an increase in those benefits if the global electronic marketplace is allowed to develop to its full potential without rigid strictures imposed on this still nascent technology.

The Growth of E-Commerce. Increasingly, consumers with access to the Internet are finding that on-line shopping offers numerous benefits for them. While not yet a “mainstream” source of purchasing, Internet shopping continues on a strong growth curve. It is clear that an increasing number of consumers value the Internet for ease and convenience of shopping and the wide selections available, ranging from the mundane to the highly specialized. No matter what one’s shopping interests are – 1940s toasters to high performance computers – Internet vendors are there.

Electronic commerce is not a national but a global phenomenon. It offers people across the globe significant increases in consumer choice and competition, which have the potential to significantly lower costs – including transaction costs—for consumers.

The Complexities of Global Electronic Commerce. The Administration’s “Framework for Global Electronic Commerce” provides important principles that help clarify the issues and point to the importance of private sector leadership in overseeing this dynamic marketplace.

The “Framework” cautions that “governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures, or taxes and tariffs on commercial activities that take place via the Internet.”

Consumer Alert would also urge governments both here and abroad to recognize the uniqueness and potential of electronic commerce in providing broad consumer benefits and not stifle these developments through top-down regulation and the imposition of taxes. The growth and development of the Internet and its commercial activities is a remarkable story of vibrant entrepreneurship, where protocols, standards, and conventions have been developed and modified at a swift pace. Those developments, integral to the nature of the Internet, should be encouraged, not shackled.

Internet Taxation As Commission members and witnesses have earlier stated, the multi-state taxation of Internet commerce is an extremely complex issue. The questions at issue are whether e-commerce should be taxed; if so, how should it be taxed. We often are told that the process should be simple, consistent, and non-discriminatory. Different schemes for purchases of tangible items vs. digital products are also an issue. Those issues cannot easily be decided by numerous competing interests involved in the debates.

Businesses both large and small that market and sell on the Internet are concerned about such issues as the enormous complexity of different tax laws under 30,000 or so multiple and overlapping jurisdictions. Small Internet businesses and “Mom & Pop” sales sites would be particularly affected by schemes of taxation that would require them to track transactions, ascertain the appropriate jurisdiction for each transaction, sift through thousands of pages of mind-boggling tax codes, and make innumerable tax filings with the various authorities. Such complexities would seriously hamper all but the largest firms from participating and flourishing in the burgeoning field of e-commerce.

Many state, county and local jurisdictions, fearful that the growth of the electronic marketplace will decrease their tax revenues from traditional retail sales, are presenting the specter of decreasing services for their citizens because of budget shortfalls. Thus, many in that sector support new tax schemes for the Internet.

However, the interests of the most important sector of the taxation debate, the consumer who would pay the taxes, are often not fully considered.

Privacy Considerations Relating to Tax Schemes One major issue relating to consumers’ purchasing goods and services on the Internet is privacy of those transactions. Many advocates view the government as the source of privacy standards and regulations regarding what firms can ask and collect about their customers. Proposals for mandating privacy disclosures, the contents of those disclosures, and restrictions on the private collection and dissemination of personal information have dominated the privacy discussions.

However, at issue with regard to potential Internet taxation is the concern that consumers’ privacy will be violated through tax liability and verification schemes imposed on customers. Such proposals present a far greater threat to consumers’ privacy than do private, non-coercive uses of information.

There is a real danger that in their zeal to collect sales taxes, some states and local jurisdictions may force vendors to require that their Internet customers disclose personal information for tax liability and collection purposes.

Laws and regulations that would require Internet customers to provide legal identification would be particularly intrusive on consumers’ rights. Individual firms should be able to establish their own approaches to customer authentication, and consumers should be able to decide whether a vendor’s policy for personal information disclosure is acceptable to them.

In some of the schemes for Internet taxation, proposals have been made for software that would track customers’ remote purchases, calculate sales taxes due, and remit them electronically to the appropriate jurisdictions. The “Big Brother” collection and use of personal information and the huge databases of detailed consumer information would be a blatant intrusion on individuals’ rights.

Some have proposed the use of third-party accredited verifiers of tax records of e-commerce vendors and a system of electronic notaries, with government auditors overseeing those third-parties. Sales taxes thus verified and audited would be collected on all transactions—presumably by the federal government and paid to the jurisdiction where the purchaser resides.

Such a byzantine structure would lend itself to the creation of a huge bureaucracy of quasi-government employees, with significant power over both vendors and consumers and with access to millions of consumers’ data on e-commerce purchases. Such a scheme would attack the very foundation of consumer privacy on the Internet.

Conclusion The technological and institutional changes that are occurring as the global electronic marketplace becomes more widely used are certainly substantial. Consumer Alert views these changes not as threatening, but as providing new opportunities to advance consumer interests, specifically those consumers least well served in today’s world. This confidence is based on the fact that Internet will reduce the cost of information as well as the cost of transactions and thus will make it possible to serve an ever greater proportion of the consumer population.

Restricting the evolution of this phenomenon through attempts to impose a tax regime on this medium will thus be a disservice to consumers.

Appendix

Consumers and Electronic Commerce – Certainty, Security, and Assurance In engaging in electronic commerce, consumers want a high level of certainty about the security of their financial transactions, confidence that the product or service provided is as advertised or described, and assurance that if there are problems with products purchased electronically, those can be resolved.

Consumer Alert would urge the U.S. to follow the precedent of treaties that establish a rule of law by which parties can be assured that contractual arrangements are met, that disputes can be settled, and that liability issues can be resolved. We would, however, caution that such agreements should not deal with cultural differences that may exist among countries that may act as non-tariff trade barriers and stifle the global development of the Internet.

In terms of security of consumers’ financial transactions on the Internet, credit cards, stored-value cards or services, and electronic “cash” are available, with numerous intermediaries formed to ensure the security of the information flows. Strong encryption technology and its ability to be exported is essential in protecting consumers from fraud and theft in Internet transactions.

Privacy Issues Relating to Companies’ Collection and Use of Information

Consumer Benefits of Internet and the Free Flow of Information. The Internet is a dynamic and evolving medium that is still in its infancy. It is also a medium that is used for a variety of purposes: for communication, entertainment, education, research, and purchasing.

Many groups, including non-profit groups, collect information about users who access their materials. Commercial and non-profit organizations may collect user information for a variety of reasons: to discover more about users so that they will be able to tailor or improve their offerings; to survey for research or polling purposes consumer preferences, attitudes, or habits; to offer products or services to those most likely to be interested in them; and so on.

Many discussions on Internet privacy focus on perceived hazards of information collection and not the benefits—the enormous consumer benefits that are made possible through such private information compilation. Information collected and maintained by organizations whose purpose is to gain profits by providing valuable services and products to willing consumers poses no danger to privacy. The point of such information is not to violate rights, but to provide goods and services more effectively, at lower cost, and to those who desire them.

People who don’t want to consider an offer can protect themselves by the “opt out” option; they can decide to reveal information only on the condition that it won’t be shared with others. This allows those who seek to secure complete privacy or anonymity to do so by exercise of their rights, and with relatively low transaction costs overall, in contrast to restricting the rights of others. Proposals to reverse this principle, and to require that individuals actively “opt in” by means of some legal instrument before any information about them can be shared, would create enormous barriers to the free flow of beneficial information. Numerous groups that use Web sites to collect information voluntarily disclose how that information will be used and if it is to be sold. Adults accessing Web sites can make decisions for themselves about whether they want to access sites without disclosures. They can also make their individual decisions about whether to disclose the information requested through surveys, questionnaires, etc.

One important issue is the fact that people on the Internet are not homogeneous—Internet users include diverse individuals with many different preferences, including preferences regarding privacy. Yet the tenor of much of the privacy discussions is that standards or regulations that reflect an extreme view of privacy are needed to protect all users. Such “one size fits all” standardization would run roughshod over consumers’ own preferences and values.

Consumer Alert urges policymakers to consider the importance of the information industries in extending benefits to consumers and how consumers may suffer individually if useful and benign information is bottled up by ill-conceived regulations.

Self-regulatory guidelines established by industry groups and new technological approaches to allow Internet users to choose their own levels of privacy are able to adapt much more rapidly to concerns that arise. Consumers can also deal with many of their own privacy concerns though the use of technology—anonymity, for example, or in protecting their children, by the use of filtering or blocking software.

Responsible companies—those that plan on being around over the long term—have a real interest in meeting their customers’ wants and needs, including those relating to privacy. They know that running roughshod over consumer preferences is not a way to gain customers and earn profits. Thus, companies are extremely sensitive to real consumer concerns about privacy and about information use, especially relating to children. Those companies, not the “bad apples,” are the ones that will survive and thrive.

Self-regulation is not just a way to avoid government regulation—it is a better way to ensure that consumers’ varied needs are being addressed. Market solutions to concerns also respond to rapid changes, such as those taking place in cyberspace. And the market is better able to respond with technological innovations than can government with statutory regulations.

Private Standards-Setting. There is a long history of effective private standards-setting organizations in the U.S. and in the international arena. In connection with the Internet, the very development of this phenomenon is partly attributable to the success of private standards groups.

Private standards-setting is critical to the continued evolution of the Internet in serving consumers’ needs in electronic commerce. The development of organizations serving those needs has been robust, and consumers receive “protection” in their transactions with businesses from a variety of sources, with new types of approaches on the horizon: •“Brand names” – Merchandise or services purchased from “brand name” companies historically have provided consumers with assurance of quality and recourse. In cyberspace also, brand name consumer product firms generally stand behind their products because loss of customer satisfaction can affect other product lines and ultimately the commercial viability of the brand. As such, brand names have acted and continue to act as quality indicators. •Certification as a Legitimate Business – For newer or smaller firms that are proliferating on the Internet, certification organizations are burgeoning. Such groups may engage in a variety of standards setting, such as certifying that a firm or a vendor is a legitimate business and can be verified as a commercial entity. That information is extremely important to consumers’ shopping on-line. Since the entry costs to e-commerce are very low, fly-by-night fraudulent companies can set up sites and operate scams to bilk consumers quickly and then move on.

Consumer Alert would suggest that credit card systems and other network operations for electronic commerce already require that vendor information be provided. Since the card issuers would bear the costs for scam e-commerce sales using credit card numbers (if they are notified in a timely fashion by the card-holder), it is in their interests to take a leadership role in vendor verification.

•Certification in the Privacy Arena – Various organizations have arisen to set privacy standards for firms and to monitor their adherence to those standards. Already such organizations as TRUSTe and the BBBOnLine privacy program, though in their infancy, are already becoming well-known to consumers using the Internet for shopping and other purposes.

These and other developing programs generally offer “seals” to firms that agree to their standards, monitor and review the firms for compliance with the standards, operate dispute resolution and enforcement programs, and help educate consumers about the importance of dealing with reputable companies.

•Intermediaries or Consumer “Brokers” – Just as in the real world consumers use intermediaries and brokers for more assured access to and negotiations with legitimate businesses, the proliferation of consumer “brokers” on the Internet is a very positive development for consumers.

The concept of consumer “agents” is not new, but the application of the concept to the Internet is still in its fledgling stages. The most common example of widespread consumer use of intermediaries in their financial dealings is real estate agents. Traditionally, those agents have represented both buyer and seller. More recently, some agents have targeted their services as representing only buyers in real estate transactions.

One can easily envision how the “customer agency” concept can develop in similar ways not only for consumer products and services, but also for negotiating consumer preferences. The consultant John Hagel III has coined the term “infomediaries” to describe a likely development on the Internet in which consumers provide preference information to the automated intermediaries, who then “shop” the Internet to match the customer preferences with the commercial enterprises.

In the privacy arena, this could have important implications for the expansion of private programs rather than government regulation in addressing consumers’ privacy concerns. On the Internet and elsewhere, privacy is a value-laden term—it means different things to different people. Government attempts to define privacy in a certain way, with certain dimensions, often doesn’t recognize the fact that privacy for one person may mean complete anonymity, while for another it may mean ensuring that his or her financial transactions are secure.

Also, in many instances, privacy regulations fail to recognize the trade-offs many consumers take for granted in the compilation and use of personal information by the private sector. In many commercial transactions in the real world, consumers may provide information in exchange for some benefit – the supermarket frequent shopper’s card provides a good example. Information about consumers’ buying habits is compiled, and in return consumers receive significant discounts on many supermarket items.

Hagel’s idea is that the new type of infomediary will act on consumers’ behalf by negotiating for some customer benefit in return for the provision of personal information. In his view such approaches or similar ones are on the horizon and would provide consumers with important tools for greater ease of shopping and for deciding for themselves how much privacy protection they want to preserve.

From a consumer viewpoint, there is likely to be some confusion initially about which standards-setting groups to rely on. However, in the real world, consumers over time have learned to trust certain “seals,” such as the Underwriters’ Laboratories’ UL label on electrical appliances. On the Internet, where consumer ratings and information exchange about almost every subject develop with astounding speed, there undoubtedly will be a “quest for the best” that will weed out the weak groups. The media, also, play an important role in providing such consumer information about the quality of the standards-setting groups through articles, guides, and checklists.

Private standards-setting also has an important advantage over regulatory regimes in that standards can be revised and updated rapidly. That attribute is particularly critical in relation to Internet standards because of the rapid pace of change. Government regulations quickly become outmoded and easily ossified in such an environment, and can do more harm than good.