CAPITOL HILL’S CYBER CHARGE

Byline: Joanna Ramey

There are signs Congress will tinker with the Web this year, and some clues are emerging as to what type of legislation lawmakers might spin.
Looming in cyberspace remain two red-hot consumer issues that keep gaining steam on Capitol Hill: whether all e-commerce should be subject to sales tax and whether Web sites must give visitors a say in how businesses and other groups use their personal data — from frequency of purchases and fashion preferences to address, age and annual income.
To become law, naturally, Internet sales tax and privacy legislation has to run a battery of political tests in the newly assembled 107th Congress and has to pass muster with newly ensconced President George W. Bush. While acknowledging Bush’s GOP mantra of less regulation for business is likely to define any Net measure, Web watchers believe the outcome of any Net legislation this year is still a wild card — one that will be shaped, in part, by the lobbying of consumer advocates, traditional retailers, Internet pure plays and even state governors, some of whom are expected to launch legislative efforts of their own.
One thing is certain: It won’t be a smooth ride.
At the National Retail Federation, for example, the trade group’s general counsel, Mallory Duncan, worries that privacy legislation could be too restrictive and hinder e-tailers in communicating with customers about new products, promotions and such. “We are not optimistic about Congress’s ability to write privacy rules and not create problems,” Duncan admits.
A somewhat brighter outlook is offered by Lisa Wolski, tax director at the International Mass Retail Association, who expresses mild optimism regarding prospects for passage of a useful Net-wide sales tax scheme. Traditional stores have been leading the charge for Congress to authorize such a tax as a means to establish more equal footing with Internet retailers. Currently, e-tailers are required to levy sales taxes only on purchases transacted in states where those companies have a physical presence, like offices of a warehouse, a fact, the traditional crowd has argued, that gives Net merchants an unfair advantage. Internet pure plays have countered that the tax rule is one of the only platforms from which they can compete against well-entrenched multichannel players, many of whom have high-profile brands to leverage on the Web.
A number of states, like President Bush’s home state of Texas, don’t have income taxes and therefore rely heavily on sales taxes to finance cities and schools — a fact that favors the camp advocating a tax on all Net sales. However, there are also politicians in other states, such as Oregon and Virginia, who oppose a Net-wide sales tax, as they fear it will hamstring growth of high tech firms in their districts. “The signals we were getting from Sen. [John] McCain’s office was that a compromise was moving forward,” says Wolski, speaking of the Arizona Republican and chairman of the Senate Commerce Committee who’s a key player in the tax and privacy debates.Then the election happened, and things stalled. There is a lot of interest,” Wolski adds, “to try and pick up where they left off last fall.”
There are also plenty of obstacles.
Even though lawmakers’ views on Internet legislation are not diverging along party lines — and might seem like the perfect issue to tackle in these days of partisan rancor — sales tax and privacy bills simply are not at the top of either Congress’s agenda or the Bush administration’s priorities. Still, they cannot be ruled out of possible action this year.
Bush, so far, has mentioned the need for some kind of privacy legislation to protect against the misuse of consumer information, and he’s hinted at support for a Net sales tax.
The road map for Internet legislation starts in last year’s 106th Congress, which held hearings on privacy and sales taxes and laid the groundwork for the 107th. The Capitol Hill power brokers on these issues are also still in place.
Leading the charge for privacy legislation, along with McCain, are other Commerce Committee members, Sen. Ernest (Fritz) Hollings (D., S.C.), the top Democrat on the panel, and Sens. Conrad Burns (R., Montana) and Ron Wyden (D., Ore.), who last session cosponsored a bill. In addition, Sen. Patrick Leahy (D., Vt.), the lead Democrat on the Judiciary Committee, has a privacy bill, and Sens. Orin Hatch (R., Utah) and Charles Schumer (D., N.Y.), also on Judiciary, cosponsored legislation in the last Congress. In the House, Rep. Edward Markey (D., Mass.) has advocated privacy rules.
While the Senate has eagerly tackled the issue of Net privacy through several hearings, there has been little movement in the House. The attention being paid privacy by lawmakers is largely in response to outcries from privacy advocates criticizing Web sites and advertisers for using consumer information without prior notice. Meanwhile, e-tailers are now acknowledging that consumer concerns over the privacy matter can curtail their Web sites’ sales online. Legislation submitted last year on privacy typically focused on whether Congress should require Web sites to either let consumers agree up front — or opt-in — for their information to be used by a site or shared with other concerns. Privacy rights advocates typically favor an opt-in system because they say, that way, cybershoppers will be more aware of how their personal information could be used. In contrast, e-tailers and other Web companies have lobbied for opt-out systems, or those requiring people to request that their personal data not be shared, among other options that remain in effect unless a user tells the site otherwise.
For his part, NRF counsel Duncan says an opt-in system only makes sense to protect sensitive information like financial or medical records. Otherwise, consumers could miss out on, say, being notified of product promotions or sales tailored to their own buying habits. “This system saves retailers money and gives consumers [better service,]” Duncan contends.
This year, more e-commerce sites are expected to abandon the virtual sidelines and implement privacy policies or upgrade existing ones, after the recent uproar over both real and potential breaches in privacy. Plus, there’s the growing recognition among commercial interests that privacy legislation may be a good thing. A case in point: the recent support accorded an opt-out privacy bill by the American Electronics Association. The AEA originally favored self-regulation by the private sector, but on Jan. 19, the group threw its support behind federal action as a way to head off a flurry of state privacy legislation.
“I used to advocate no government involvement,” recalls Gary Clayton, chief executive officer of the Privacy Council, a Dallas-based Web security consultant. “Then I changed my mind as consumers became more concerned about online transactions.”
Like their counterparts in the private sector, lawmakers increasingly see the establishment of privacy rules for the Net as a condition that will spur e-commerce, but they concede that “it will take a while before a consensus is reached” and legislation is passed.
An active Federal Trade Commission has been helping to nudge Congress and e-commerce companies to accept the need for government-mandated privacy policies. And until FTC chairman Robert Pitofsky resigns, or his term expires in September, the regulatory agency will be governed by a 3-2 Democrat majority. When Bush is given the chance to replace Pitofsky, the Republicans will dominate 3-2, which then could bring a shift in the agency’s outlook on the matter.
For now, says Ari Schwartz, policy analyst with the Center for Democracy and Technology, which advocates privacy legislation, “Chairman Pitofsky will probably stay on for a little while so things may not change that quickly.” And while it is unclear as yet how the new President will handle the issue of privacy online, Schwartz suggests that Bush may find common ground with conservative groups like Phyllis Schlafley’s Eagle Forum, a network for conservative causes that advocates Web privacy protections as a moral issue.
On Pitofsky’s watch, the FTC has set voluntary guidelines on Web privacy protections recommending sites offer users notice that their personal data is being collected and offer those people a choice about what information can be shared with third parties, or otherwise used to market to them. FTC further advised Web players that their sites also should provide consumers access to the data and provide a sound security system to protect the information from misuse. In addition, the commission asked Congress to, at the minimum, require all Web sites to implement privacy policies — a mandate that would strengthen the FTC’s hand in protecting consumers.
“It’s an interesting dynamic because the Federal Trade Commission became even more active than President Clinton’s privacy agenda,” observes Bart Lazar, an attorney who has worked on the issue with various companies. “The President was more interested in self-regulation, but the FTC found that self-regulation wasn’t working, and legislation was needed.”
As with privacy, the Senate has been more active than the House on the Net sales tax issue. In the House, there remains a widely held misperception that a Net-wide sales tax would be a new tax and thus anathema to Republican tax-cutting leadership. In addition, many House Democrats are opposed to a Net sales tax because of opposition from high tech constituencies. What traditional retailers want lawmakers to understand is that states already have the right to collect sales tax from a portion of the e-commerce conducted in their jurisdiction, but collecting that revenue is virtually impossible. Among the problems are the thousands of different local and state rates and the varying products that are taxed, an issue that some states are starting to tackle with an eye to establishing an Internet standard. To facilitate collection, the pro-tax contingent wants Congress to use its interstate commerce regulatory power to create a national Net tax scheme.
Further complicating matters is the view held by some lawmakers that enacting a national Net sales tax system would violate the popular no-new-Net-tax moratorium enacted by Congress, one that does not expire until October. “More than anything last year, the Internet sales tax was an issue of misunderstanding,” contends Scott Cahill, NRF’s vice president of government and industry affairs. “In the Senate, we were able to educate the members these are two separate issues, but the House didn’t provide adequate hearings [to hash things out].”
Among the apparent converts in the Senate are Commerce chairman McCain, who last year made no Net sales tax an issue in his campaign for GOP presidential nominee.
McCain recently told WWD he is inclined to further some form of Net sales-tax bill. “As long as we preserve the Internet itself and its viability, that’s what I care about,” McCain says. The Arizona Republican expects the issue of a national Net tax to be taken up along with an extension of the no-new-Net-tax moratorium that expires in October, a tactic that would force lawmakers to tackle both Internet tax issues at once. “There is no doubt October is going to force [Internet sales tax] to be a priority issue,” McCain projects.
McCain’s Commerce colleague Wyden doesn’t see the issue resolving itself that quickly, however. Wyden is a sponsor of an extension of the Internet tax moratorium, but opposes any move by Congress to enable a national Net tax scheme. Cosponsoring Wyden’s bill in the House is Rep. Chris Cox (R., Calif.). “There is nothing in the law Chris Cox and I wrote that prevents a state from going ahead and putting a system of Internet state tax collection in place,” Wyden tells WWD. “The reason they don’t,” Wyden maintains, “is they don’t want to take the political heat.”

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