Does the U.S. Really Need an Internet Sales Tax?

Recently I received an email from eBay’s Government Relations department urging me to write my Congressmen and ask that they oppose any federal legislation which requires online vendors to charge a sales tax. According to eBay, there are too many tax jurisdictions (allegedly over 15,000 in the United States) to make an Internet sales tax feasible. Further, the added costs and complexity involved with any proposed Internet sales tax would likely cause many small businesses to close.

I agree with eBay that an Internet sales tax is not needed (at least not yet) but I disagree with eBay’s self-serving rationale for opposing any such legislation.

The impetus for an Internet Sales Tax is to make up for revenue lost through online shopping where sales tax is not always required. According to a recent U.S. Census report, total e-commerce sales for 2007 were estimated at $136.4 billion, an increase of 19% from 2006. It is debatable what that means in lost sales taxes for state and local governments, but of the states that have sales tax, 25% of their annual revenue comes from sales tax collection. In spite of these alleged losses of revenue, I am far from persuaded that an Internet sales tax is justified for all web transactions.

First, sales tax is not the only tool local governments have for raising funds. As a homeowner, I have first-hand experience with counties raising revenue through increased property taxes. How tax assessors can increase property taxes while home prices nationwide have dropped is beyond me, but it is clear that there are other means local governments eagerly use to raise revenue.

Secondly, as senior tax attorney Bruce Gardner suggests, eBay is essentially nothing more than a glorified yard or garage sale where sales tax is never collected. This comparison works particularly well when applied to the bare-bone Internet site Craig’s List which literally is an online garage sale. Unlike most garages sales, the products auctioned off on eBay can cost hundreds if not thousands of dollars. Notwithstanding, there are still a number of small ticket items sold on eBay by small time vendors that merit the “taxman” turning a blind eye just as he does for garage sales.

The aforementioned argument, however, becomes problematic when considering mega retail websites that sell massive amounts of small ticket items. Specifically, I am referring to the 800-pound online gorillas Amazon and iTunes, the two are major players in retail sales for books and music. Under the current system, iTunes and Amazon have a distinct advantage over competitors like Barnes and Nobles which operate brick and mortar stores throughout the country and therefore are required to include sales tax with their online sales.

At first blush, it appears that the “unfair advantage” Amazon and iTunes have is all the justification needed for imposing an Internet sales tax. After further examination, however, the short-sightedness of this argument is readily apparent. If Congress makes it more expensive for Americans to buy from U.S. operated websites, consumers will simply buy products from abroad. Keep in mind that there is no duty that the government can impose on consumers when buying and downloading digital music and audio books from websites owned and operated by foreign companies. As a result, Congress needs to act gingerly when evaluating the net sum gain of imposing an Internet sales tax.

The last argument I found from proponents of an Internet sales tax is so outlandish that I could not refrain from commenting. According to the Federation of Tax Administrators (”FTA”), Americans who purchase items online without paying a sales tax are cheating the government. On the contrary, Americans are voting with their pocketbooks that online shopping provides competitive pricing and convenience. To the extent that online shopping is also preferred for not having sales tax charges, it is both a reflection that sales taxes are disfavored and that the public distrusts how the government uses their tax dollars.

To be discussed more thoroughly in my forthcoming post, the permeation of government mis-spending should cause consumers to question the benefits of paying a sales tax. Organizations like the FTA, therefore, should be more concerned as to why Americans do not want to pay sales taxes than they are with characterizing frugal shoppers as being unpatriotic.

2008 Delegate Scorecard for the U.S. Presidency

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Can Big Brother Regulate How Online Behavior Is Tracked Through Self-Regulated Guidelines?

 

The Internet is often portrayed as a wide open frontier where you can lollygag around with no one the wiser.  Unbeknownst to most people, this is not technically true.  Websites and search engines track and record much of our online record so that they can in turn use that information to deliver targeted advertising. 

 

Is this is a violation of our right to privacy or do we even have one when it comes to the Internet?  Further what safeguards are there to ensure that our online behavior is not misappropriated to our misfortune? 

 

To answer the later question, the FTC is developing a self-regulated set of principles and practices to govern the online advertising industry.  These principles are a work in progress derived from years of experience and input from both businesses and consumer advocates.

                                                                                

The current version of the Proposed Principles can be found on the FTC’s website at:

http://www.ftc.gov/os/2007/12/P859900stmt.pdf.

 

The FTC encouraged consumers and businesses like Google and Microsoft to submit any concerns they might have with the Proposed Principles.  Following, is the letter I submitted to the FTC expressing my two pennies worth.

 

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Sent via email to BehavioralMarketingPrinciples@ftc.gov

 

April 11, 2008

 

Office of the Secretary

Federal Trade Commission

Room H-135 (Annex N)

600 Pennsylvania Avenue, NW

Washington, DC 20580

BehavioralMarketingPrinciples@ftc.gov

 

RE: Consumer Comment on the Proposed Online Behavioral Advertising Privacy Principles

 

To Whom It May Concern:

 

It is my understanding that today, Friday, April 11, 2008, is the last day for submitting comments to the FTC regarding the Proposed Principles (“PP”) for online behavioral advertising.  As both a consumer and a former advertising executive who utilized online advertising in its infancy, please consider the following.

 

First, the FTC should be commended for putting together such a thorough and succinct code of conduct to govern this growing niche industry.  At first blush, there seemed to be a number of unanswered issues not addressed by the principles.  After further review, I found that many of my concerns were resolved by the footnotes and the incorporated hyperlinked documents.  Thus, in its totality, I am hard pressed to find many gripes with the PP beyond wishing it would have been created many years earlier.

 

Notwithstanding my aforementioned comment, the PP has one major flaw repeated in Proposed Principle Nos. three and four.  Both of these principles urge companies to get affirmative express consent from consumers for changes to a company’s privacy policy or when using sensitive consumer data.  So there is no misunderstanding, I am not arguing that consumer consent is bad; instead, my contention is that the proposed execution of these principles is fatally flawed.

 

a.  The PP make no assurance that when companies solicit consent from a consumer that the consumer is competent enough, is the owner of the computer or is even of legal age to agree to the terms.

 

b.  The PP is advocating adhesion contracts which are disfavored and are generally not written in the consumer’s best interest.  The consumer has no opportunity to negotiate the terms of their consent; instead, they can only choose to “take it or leave it.”

 

c.  Consumers on the Internet are desensitized by the plethora of pop-up ads and interstitial web pages.  As a result, any requests for “affirmative express consent” will likely be given little attention by the consumer similar to how licensing agreements for software programs are often ignored. 

 

d.  The PP provides no safeguards for whether consumers will truly understand the significance of a request for “affirmative express consent.”  If these principles are going to protect all consumers, further caution is needed to assure that all consumers understand what they are consenting to, regardless of their level of sophistication and education. 

 

By way of example, Missouri attorneys can not advertise for something as simple as a speeding ticket without including language to the effect that “the choice of a lawyer is an important decision and should not be based solely upon advertisements.”  Consenting to have your online behavior tracked by unknown entities and used for advertising purposes is a much graver decision in comparison to selecting an attorney to help reduce a speeding ticket fine.

 

I recognize that these issues can not be resolved exclusively through placing further guidelines on advertisers.  Instead, I proffer that the FTC and the private sector supplement the PP with a consumer education initiative.  Americans are bringing the Internet into their homes with only minimal understanding that their online habits are being tracked and used.  In practice, the PP can be a useful tool for consumer and advertisers, but the parties need to be on a more level playing field.  Only through a legitimate consumer education program will the average American be able to evaluate whether to consent to having their online behavior tracked.

 

Sincerely, 

 

/s/ Greg Harding, Esq.

 

Scrabulous Will Be Hasbro’s Golden Egg If They Can Keep It Out of the Courtoom

Congratulations to Hasbro’s legal team for exhibiting legal restraint and not giving in to corporate greed.  The company has an opportunity to file a legitimate multi-million dollar lawsuit against Facebook for hosting the online game Scrabulous, which is a clear knock-off of Hasbro’s board game Scrabble.  Instead, Hasbro is trying to reach amicable resolution without involving the courts.

 

So there is no misunderstanding, Hasbro sent Facebook a pro forma “cease and desist” letter demanding that Scrabulous be removed from the site, but that is more akin to a barking dog with no bite; it is just a starting point to begin negotiations.  It would be foolhardy for Hasbro to declare war on Facebook because the truth is that Hasbro should be embarrassed that they did not develop an online game for Facebook first.  As result, Hasbro is wise to avoid any public litigation on this controversy.

 

Hasbro should be most embarrassed by who beat them to the Facebook market.  Scrabulous is not the brainchild of any major corporation or even a Silicon Valley start-up, but the creation of two twenty-something brothers, Rajat and Jayant Agarwalla, who live half-way around the world in India.  Presumably without any market research, these brothers designed one of the most popular online games while paying homage to Scrabble in the process.  Scrabulous carries over all of the standard Scrabble rules, but goes on to add an automatic word-verifier, a hyperlinked dictionary, the ability to match up people for pick-up games and many other features too numerous to mention. 

 

Hasbro must also feel silly that a phenomenon like Scrabulous developed right under their corporate noses.  The game has single-handedly brought Scrabble into the 21^st century not through a fancy integrated marketing campaign, but through simple viral email and word-of-mouth marketing.  Further, unlike other online applications which cater to a single age group, Scrabulous attracts players from all age groups.  By way of example, Andrea Schnitzer, a recent college graduate who now works in Washington, DC, persuaded both her mother in Chicago and her aunt in Boston to join Facebook just so they could all play Scrabulous together.

 

As popular as Scrabulous has become, it is still surprising to see how vigilant its fan base is.  Upon hearing that Hasbro asked Facebook to remove Scrabulous, thousands of fans signed online petitions in opposition.  Interesting to note these petitions articulately recognize Hasbro’s right to protect its intellectual property while simultaneously pleading Hasbro not to dismantle the game.  One petition even urges supporters to write Hasbro’s CEO in Providence, Rhode Island, and demand Hasbro to hire the Agarwalla brothers as permanent game designers.  It is commendable that Scrabulous fans are so loyal, but there is no justification for these demands.  The Agarwalla brothers are not Internet Pioneers; they are designers of a simple Internet game “suitable for people of all ages.”

 

With so much public outcry, Hasbro would be crazy to file a lawsuit against Facebook and anger Scrabulous’ very savvy fan base.  Every Scrabulous player is a potential Scrabble customer and Hasbro would be imprudent to do anything that alienates their newfound market base.  More importantly, Facebook has demonstrated that it is an excellent platform for breathing new life into old brands; something Hasbro ought to be negotiating for in their settlement discussions with Facebook. 

 

It remains unclear who at Hasbro is responsible for the company being so out of touch with its audience that the Agarwalla brothers could so easily to show them up.  Shareholders should blame the senior management, but more than likely the buck will be passed down to a marketing executive or even to Hasbro’s advertising agency of record.  As a result, it is highly likely that Hasbro will send out Request for Proposals for a new advertising agency to serve as both a scapegoat and to better help the company interact with online players.

 

In spite of Hasbro’s huge marketing snafu, it is reassuring to see two corporations trying to resolve their differences.  Beyond creating goodwill, it should be noted that there are ulterior motives guiding Hasbro’s legal approach.  If Hasbro brought a costly legal action against Facebook, they would do so with little certainty of the results due to the limited caselaw involving social networking sites like Facebook.  There are a number of cases that deal with “file sharing sites” that facilitate music piracy, but the applicability of that body of law to the Scrabble/Scrabulous issue is questionable.  Due to the costs and uncertainty in bringing a lawsuit, coupled with the public embarrassment Hasbro is already experiencing, an amicable resolution clearly makes the most sense.