October 9, 2000

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Internet Legislation

The federal government is in no hurry to push privacy or tax bills, but states, the FTC, and the public are policing the Web

By Cheryl Rosen

More on privacy:

sidebar: Litigation: The Price Of Doing Business In The New Economy InternetWeek: Don't Tax You, Don't Tax Me, Tax That Man Behind IP (9/25/00) TechWeb: Online Privacy Tools Are Within Reach (9/20/00) InternetWeek: Privacy Policies Questioned (9/18/00)

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he congressional session is in its waning weeks, the November elections are approaching, and it's just not good form to push through too many policy changes at the tail end of an administration. So the odds are small that the federal government will interfere with the Internet this year, either through an Internet sales tax or privacy bill laws.

One bill does have a slim chance of passing this year: the Consumer Internet Privacy Enhancement Act, sponsored by Senate Commerce Committee chairman John McCain, R-Ariz., and Sens. John Kerry, D-Mass.; Spencer Abraham, R-Mich.; and Barbara Boxer, D-Calif. The bill mandates that Web sites spell out their privacy policies and let consumers opt out of having personal information sold to third parties. It also calls for a study of the issue for 12 to 18 months before setting firm standards.

"It's hard to predict what Congress will do, but any push for Internet privacy legislation is complicated by the fact that Congress still has to pass several appropriations bills," says Andrew Shen, a policy analyst at the Electronic Privacy Information Center. "I'd be surprised if any privacy bill gathers enough speed to pass."

Still, bad news regarding the use of customer data keeps making headlines--and public opinion is veering toward unforgiving. An August study by the Pew Internet & American Life Project in Washington found that 26% of Americans favor shutting down Web sites that violate their privacy policies, and 11% favor jail time for the executives behind those sites.

Several E-retailers have added to the concern. Following the Toysmart.com debacle, in which the defunct toy seller tried to sell 200,000 customer names as it went into bankruptcy, Amazon.com Inc. kicked up the dust. On Sept. 1, Amazon.com proved just how ineffective a self-regulated privacy policy can be when it revealed that it reserves the right to sell the data it holds on 23 million Americans should the company ever be acquired or go belly-up. An Amazon.com spokesman says the newly posted policy is merely a clarification of its original privacy policy. "Our previous policy said we don't sell, rent, lease, or give customer data to others, but if we choose to do so in the future, we'll notify you. If you don't want us to, send us an E-mail," he says. "Now we've made it very precise that our business data will go with the business. You can bet that when America Online buys Time Warner, the subscription list to People magazine is going with it."

Other players are clearing up their privacy policies. Online auction site eBay Inc. is expected to post a notice reserving the right to consider customer data a business asset. Heading in the opposite direction is Microsoft's Expedia travel Web site, which this month posted a new policy that clearly states it won't sell customer information even if it goes out of business, says marketing director Susie Levine.

While self-regulation may work for now, the push for something along the lines of the Consumer Internet Privacy Enhancement Act will be a top issue for the next Congress. Vice President Al Gore is calling for an Electronic Bill of Rights that would let consumers choose whether personal information is disclosed, to know how and when that information is used, and to review it for accuracy. Texas Gov. George W. Bush likely will work with the private sector to push forth privacy standards.

If privacy legislation looks unlikely this year, the odds of a federal Internet sales tax being implemented appear even lower. The official platforms of both the Democratic and Republican parties make their opposition to taxation clear. The Republican platform opposes tariffs, duties, or taxes on the Internet and calls for a permanent ban on access taxes and an extension of the current moratorium on Internet taxes, which runs into next year. The Democratic Party's platform also supports efforts to keep cyberspace a duty-free zone. It states that governments should maintain minimal involvement or intervention in E-commerce.

But taxes are also a state issue, and the first test of Internet taxation at the state level has already stalled. In California, a bill to collect a 7.25% tax for online sales from companies that also have brick-and-mortar stores in the state passed the legislature but is expected to be vetoed by Gov. Gray Davis. Asked about the bill at a meeting of California businessmen this month, Davis said he's "philosophically opposed to Internet taxes."

The heart of the tax issue may well be in the legal details. Technically, online sales already are subject to taxes, says Rick Lane, director of E-commerce and Internet technology at the U.S. Chamber of Commerce. "There's been a misrepresentation of the issues," he says. "If you buy something on the Internet, you, the consumer, are supposed to write a check to the government. Of course, no one does. Something will pass next year to allow states to put together mechanisms for taxation collection."

Many click-and-mortar companies favor Internet taxation, including the nation's largest retailer, Wal-Mart Stores Inc. "Retailers who sell goods over the Internet are receiving a subsidy," says a Wal-Mart spokesman. "But we've seen Internet retailers grow at a meteoric rate. Does this really sound like an industry that needs a subsidy?"

While the prognosis is good for no taxation and the continued use of self-regulated privacy policies through December, that's not to say the coast is totally clear, especially for companies that post a privacy policy but don't uphold it. The public is watching--and so are the media and the Federal Trade Commission, in whose hands the policing of privacy policies now lies. It was the FTC that moved against Toysmart.com and other E-retailers. "I'd like to see the FTC find more test cases," says a spokesman for TrustE, a privacy watchdog organization. "Before we pass new laws, I'd like to see government enforce the ones we have."

In May, the FTC told Congress that self-regulation alone was not enough to protect consumers' online privacy. Instead, it asked for legislation that requires consumer-oriented sites to comply with four information principles: notice, choice, access, and security. FTC Commissioner Orson Swindle dissented from the recommendation, calling it "embarrassingly flawed." He wrote in a statement that the FTC "owes it to Congress--and the public--to comment more specifically on what is has in mind before it recommends legislation."

Individual states may proceed with their own initiatives. This month, Missouri Attorney General Jay Nixon charged health and nutrition retailer More.com with sharing customer information in conflict with its stated privacy policy and using cookies to track customers. Nixon has asked the Greene County, Mo., circuit court for an injunction to stop More.com from "misrepresenting" its privacy policy and to require More.com to pay unspecified penalties and court costs.

But a patchwork of laws that differ from state to state is the worst scenario, says Chris Zoladz, VP of information protection at Marriott International Inc., who, like many in the IT industry, supports the McCain proposal. "It's important that legislation not be put forth until the issue has been thoroughly reviewed, and that legislation should be at the federal level," he says.

If federal and state governments fail to take action and the high-tech industry doesn't get its house in order, it will be up to the private sector and the FTC to police privacy policies--and that means lawsuits, says attorney Ron Plesser, a partner at Piper, Marbury, Rudnick & Wolf in Washington. The privacy issue isn't going away. Says Plesser, "Ignoring it in the meantime is a bad mistake."

Photo by Scott Robinson

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