Speed Traps, Lemonade Stands and ' e-Commerce Issues

Many Hazards Lurk Out There

But what does an inspection binge by a local municipal code enforcer who may have visited the lemonade stand you operated as a kid have to do with your e-commerce business in 2012?

The answer comes from a recent report on enforcement of local rules from CSC. In “If Life Gives You Lemons, Make Lemonade (But You'd Better Have a Business License!)” (www.cscflash.com/article2.html), CSC expert Paul Hodnefield discusses many examples of “businesses” ' including, bizarrely, lemonade stands and dispensers of free water ' that have found themselves in trouble when they didn't comply with local licensing regulations.

While the parade of horribles in this story involved real-world firms, not law-school hypotheticals, the attraction of such enforcement against e-commerce firms seems obvious for cash-strapped local officials. Online firms usually have no local presence, and do not vote in local elections. Tech entrepreneurs receive little sympathy compared, for example, to the municipal jobs that can be preserved by collecting fines for violating local ordinances, whatever they may be. Moreover, just like the passing motoring tourist, who will lose more in time away from work to travel back to fight the ticket (even with a valid excuse), tech entrepreneurs will almost always find that the business and financial costs of defense far outweigh the practicality of just paying the fine, and moving on.

Being caught in a “regulatory speed trap” is never a winning situation for the regulated firm, online or off. In addition, consider all the risks of not settling after receiving the regulatory citation (which are just as much of a problem for traditional “bricks and mortar” firms doing business nationwide or through branch offices, as for e-commerce firms). For example:

• Contesting the local claims could hurt the company in adverse publicity;
• The opportunity cost of the executives' distraction from conducting business can eat up the thin profit margins that e-commerce firms typically generate;
• The potential costs of varying a firm's business practices from a uniform national model to meet local requirements can also eat up the time and energy of personnel, and the e-commerce firm's thin profit margin;
• Depending on the infraction, the out-of-pocket costs, with all fees and charges, can disrupt a budget for a start-up or small firm; and
• The violation may be of public record, available to competitors or vendors, and even have to be disclosed in securities filings (especially if it affects the eligibility of a key executive). Also, a licensing violation may lead to a temporary suspension of the license, which could be disruptive if the firm does not have anyone else readily available to step in.

In other words, targets of regulatory attention face a situation much like that of the speeding motorist in front of the local judge: Payment, rightly or wrongly, will cost far less than the accused trying to defend him ' or it ' self on the principle of the matter.

Despite these negatives, the risk of exposure for e-commerce firms to local holdups has perhaps increased, following Amazon.com's recent retreat in its nationwide sales-tax dispute. Absent a well-funded and prominent voice for the interstate commerce rights of firms that, by definition, do business nationally, to be free of certain state or local rules, the leverage local code enforcers can wield against online firms may grow as an unexpected fallout from the recent sales tax “armistice.”

Beginning on Sept. 1, 2012, Amazon.com dropped its resistance to local taxing authorities' assertions of sufficient nexus to require online firms to collect and remit sales taxes (see, “Pa. Sales Tax Push Puts Heat on Online Retailers,” San Francisco Chronicle, http://bit.ly/SOlWqF). (Of course, those firms always owed the same amount, as a use tax, but because they were required to pay it themselves, directly, online sellers generally refused to collect and remit the tax, and states rarely saw such funds.) But the “lack of nexus” defense pales in significance next to the practicalities of decentralized inventory shipping centers across the country. As a result, many online firms have begun to charge local sales taxes to online customers, rather than abandon their national presence, just to avoid the localities' claims of nexus, and, therefore, jurisdiction.

Presumably, the profits from e-commerce outweigh the cost of the additional taxes. (Not coincidentally, Amazon.com also began to build inventory warehouses to speed deliveries, since it no longer tries to claim exemption from sales-tax withholding obligations for lack of taxable nexus (see, “Amazon, Forced to Collect a Tax, Is Adding Roots,” Pittsburgh Post-Gazette, http://bit.ly/QM63Gb). From the jurisdictional perspective, that same physical presence in local jurisdictions provides the enforcement authority needed to assert regulatory claims against absentee defendants.

Long Arm of the Local Law

Consider the wide reach of local regulatory laws. A 2007 compilation of regulatory schemes, by the admittedly conservative activist Reason Foundation, showed hundreds of different categories of firms requiring local licenses. Thirty-three jobs require a license in all 50 states, and the study also compiles a lengthy list of “the nation's most outrageous licensing laws” (see, “Occupational Licensing: Ranking the States and Exploring Alternatives,” http://bit.ly/OPVfXe).

Although no single national compilation of regulatory rules exists, many websites provide access to a broad swath of potential sources of regulatory compliance rules. Municipal codes, for example, are linked at several sites, such as www.amle
gal.com/library.

Similarly, local ordinance links may be found at the following website addresses of these agencies and other enterprises:

• U.S. Small Business Administration. www.sba.gov/licenses-and-permits;
• About.com (part of The New York Times Co.). http://biztaxlaw.about.com/od/stateandlocalinformatoin/qt/localordinances.htm; and
• LLRX.com. A law-and-technology resource portal for lawyers, at www.llrx.com/features/ciguide.htm.

One entrepreneurial firm has even tried to cut through the chaff of local codes, and collect only the licenses most likely to be required for home based e-commerce firms (see, www.license123.com/Businesses/E-Commerce).

Different Perspectives

Also, local governments can now use a procedural tactic refined by the copyright-enforcement bar. Already, actions are routinely brought against hosting firms, and other “fixed” targets, that e-commerce firms cannot do without ' that can force an online firm to settle ' for practical and cost reasons. While such firms are truly “bystanders” to the dispute, their unwillingness to be drawn into an opportunity to enrich their lawyers can lead only to another source of pressure on e-commerce firms to bow to the regulators' will.

In fact, the burden of local regulatory enforcement on business growth has already been well studied, by another set of regulators (the Federal Trade Commission (FTC)), as well as by free-market proponents (who would abolish almost all regulation). The FTC's early studies, “Possible Anticompetitive Barriers to E-Commerce: Contact Lenses” (http://1.usa.gov/OXasWF) and “Possible Anticompetitive Barriers to E-Commerce: Wine” (http://1.usa.gov/S1WVxS), considered the effect of such rules on competition, rather than simply whether they were good business or not.

In fact, an academic symposium considered these issues from an antitrust perspective, rather than my concern of e-commerce operations, as e-commerce began to grow in the early 1990s (see, “Anticompetitive Barriers to e-Commerce: A Symposium,” http://bit.ly/Qeu47p). Separately, FTC testimony on these issues advocated elimination of local regulatory barriers, again on grounds of competition (see, http://1.usa.gov/QeuquS). Another similar study of the effects of application of real-world “health, safety and welfare” regulations to the online world involved something as down-to-earth as caskets ' which, not surprisingly, can be sold at deep discounts online, for those planning in advance (see, “Buried Online: State Laws That Limit e-Commerce in Caskets,” The Elder Law Journal, Vol. 14, p. 283; http://bit.ly/RRrGW4).

All these studies grew out of an FTC public workshop in 2002 on anti-competitive barriers to e-commerce in many two industries. The FTC studied the effect on e-commerce of local regulation in such fields as:

• Auctions;
• Automobiles;
• Caskets;
• Cyber charter schools;
• Online legal services;
• Real estate;
• Mortgages and financial services;
• Retailing; and
• Telemedicine and online pharmaceutical sales.

(www.ftc.gov/opp/ecommerce/anticompetitive/index.shtm)

The materials from the workshop include links to extensive studies on this subject, and include discussion of the burdens local regulation adds to e-commerce.

On the other hand, the early fears, such as in 2002, of such regulatory barriers to the growth of e-commerce now seem unwarranted, perhaps even optimistic, in light of e-commerce's impact on so many retail industries. In reality, online businesses have been formed and prospered regardless of the cost and burden of regulation, actual and theoretical. While the “lemonade stand” story was real, to my surprise I could not find the widespread horror stories of similar regulatory nightmares that I had expected to find (and as doom-and-gloom e-commerce prognosticators have warned of).

Yet if your business happens to be the one targeted by a local regulator, that nod to reasonableness may offer little comfort ' just ask the Nebraska “online home sale ad entrepreneur” who was pursued by the Nebraska Real Estate Commission in 2010 (see, “Online Home-Sale Ad Entrepreneur Sues Nebraska for Trying to Shut Her Down,” Pacific Legal Foundation, http://bit.ly/PUJESm). Having to pay legal fees to defend a regulatory claim doesn't get any less painful just because you know that it has not happened to many other firms (and, therefore, may be all the more galling to you).

Yet the law does offer hope, as summarized in a report by the Pacific Legal Foundation, which recently stated in a blog posting:

In recent years, federal courts have struck down various state licensing laws which required individuals to complete numerous hours of education that were unrelated to the trade in which they wished to practice. For example, a court struck down a law that required hair braiders to complete thousands of hours of irrelevant cosmetology training in order to braid hair. Another court struck down a state law requiring casket makers become licensed funeral directors in order to sell caskets. And another restricted a law requiring those who make their living trapping birds and rodents to complete hours of training in chemical pesticides. These courts understood that requiring burdensome irrelevant training in order to pursue a chosen occupation does nothing to protect the public, but instead merely protects existing favored businesses from competition. And courts have long recognized that protecting special groups from competition is not a legitimate purpose of government. As more and more business is conducted online, existing companies will push to find new ways to use government to silence their
competition.

(http://bit.ly/TryZoP)

Another example of the snares of local legislation affecting e-commerce arose with the adoption of state e-discovery rules that mandate rules very different from the federal rules (see, e.g., “State Supreme Court Adopts New Rules on e-Discovery, Rejects Federal Model, The Legal Intelligencer, June 8, 2012; http://bit.ly/LsK3wV).

The comments of one local attorney, Steve Finley, on Pennsylvania's own rules well summarize the local-law traps for online firms described in this article from all types of such rules, not just e-discovery standards, when they try to develop business models based on a national standard that simply may not be the law in a particular jurisdiction. To wit:

Because Pennsylvania has expressly rejected federal e-discovery law, Pennsylvania courts should be reluctant to, and pursuant to the commentary issued when the amendments were proposed, should refrain from, examining federal case law to resolve e-discovery disputes.

(“Pennsylvania Supreme Court Adopts E-Discovery Amendments to Pennsylvania Rules of Civil Procedure,” E-Discovery Law Alert, Aug. 9, 2012; http://bit.ly/NtD31i)

So much for cost-savings from developing expertise useful across the country.

In fact, the recent collection of sales tax in Pennsylvania by Amazon.com well illustrates the risks of inconsistent application of rules ' a particular risk in local taxation, where both rates, and what items or services, are taxable can vary, not only state-to-state, but even within a state; ask the owner of any convenience store near the Philadelphia city boundary whose suburban competitor literally across the street has a legally mandated 2% better deal because it is outside the city limits and can avoid paying city sales tax. For example, Amazon.com ' with all its resources and expertise ' still collected sales tax on shoes, even though they are not taxable in Pennsylvania, regardless of the rules elsewhere that are programmed into automated sales tax-collection software. (See, “Online Sales Tax Collection Poses Challenges for Pennsylvanians,” Pittsburgh Post-Gazette, Sept. 7, 2012; http://bit.ly/RS7eOY.) From a marketing perspective, what firm wants to see comments in the ubiquitous customer ratings at its website that it forces customers to pay taxes that do not apply?

What About the Rising Cloud?

If keeping up with local regulatory burdens seems impossible, consider the “cloud” obscuring the duties of specialized e-commerce providers (see, “Cloud Providers Struggle to Offer Regulatory Compliance,” Internet Evolution, http://bit.ly/PWvnES). Firms that choose to control costs by hiring online firms to outsource functions previously handled in-house, or by a real-world subcontractor, must be certain that the cloud provider complies with all applicable regulations for its own business, as well as the hosted one, whether those rules are federal, state, local or international. No one wants to be the person who recommended a cloud provider to save $10,000 per year, when the provider's failure to comply with applicable regulations leads to a fine many times that size.

Another aspect of the local regulatory burden faced by e-commerce firms has been highlighted in securities-offering documents of online firms. Amazon.com, for example, has for some time warned investors of that unknown expense:

Government Regulation Is Evolving and Unfavorable Changes Could Harm Our Business

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and electronic devices. Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts and other communications, consumer protection, web services, the provision of online payment services '. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content and web services. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business.

(10-K for the period ended Dec. 31, 2011)

Other online firms include similar warnings in their filings, from those as well-known as Barnes and Noble to more obscure ones such as Blue Nile, Amaru Inc. and Cape Coastal Trading Corp. Clearly, the securities bar has been attuned to the perils of local regulation for e-commerce firms, perhaps long before the industry considered it a risk (if it even does so now).

The New Is Old

On another note, as I have often observed in my columns on e-commerce, local compliance burdens, in general, are often no different than those faced by traditional businesses.

Long before the Internet was a realistic thought, it was expensive and burdensome for any business to review all ads and marketing materials for compliance with the patchworks of inconsistent laws in such areas as professional licensing, contests and marketing. Business leaders understood the need to spend money on local counsel to understand state blue-sky rules on soliciting investments, or on banking rules.

In contrast, the availability of e-commerce solutions in these fields may actually have made the research slightly less expensive and burdensome ' but it didn't take away the pain (and expense) of having to do it in the first place.

Remember: Speed Kills

In the real world, most of us slow down whenever we suspect a speed trap. Whether educated by the site of a lone police cruiser, a warning sign posted on an Internet discussion board, or simply the expensive lesson learned from paying a prior ticket, no one would seriously consider flouting such a restriction, especially when the penalties are near certain.

In e-commerce, in contrast, enforcement may be less predictable, because there are so many firms and jurisdictions. Yet for most firms, the approach should be no different than when approaching a speed trap: Slow down to follow the law.

The local sheriff enforcing a hidden speed trap against out-of-towners is a staple of the television sitcom and of many Hollywood movies. You've seen it: Obnoxious (and some not so obnoxious) vacationers pulled over and forced to pay tickets and steep fines for passing through an unexpected 20 mile-per-hour zone at 50 miles per hour.

The municipality receives consistent revenue from people who don't impose costs to provide legally required services (other than the police and judge, of course). Even better, those passers-through don't vote, so no one even has to listen to their complaints about the unfairness of a sudden drastic reduction in the permitted speed limit, or about strict enforcement of a surprise rule. And, of course, the local court is always conveniently open for the fine to be paid and, once that is taken care of, the previously unsuspecting victim “speeder” is free to continue on his way, with his family ' less the cost of the speeding fine and court costs, and maybe parking while the matter was settled ' until, perhaps, the next town with a speed trap.

Sometimes, though, enforcement of little-known rules, or rules few people ' such as children trying to earn some pocket change during the summer, and, perhaps, these children's parents ' is even more surprising and annoying and, although justified under the letter of the law, can seem downright mean-spirited. Consider, for example, that fixture of many an American youngster's summertime efforts at entrepreneurship: the lemonade stand. Consider, too, the all-too-frequent shutting down of the corner lemonade stand operated by an 8-year-old and his twin sister from behind a rickety card table holding a plastic pitcher filled with premixed lukewarm lemonade by the enthusiastic local code-enforcement officer ' because the children hadn't obtained a business license to operate the stand. Maybe a fine is in the offing, too.

Many Hazards Lurk Out There

But what does an inspection binge by a local municipal code enforcer who may have visited the lemonade stand you operated as a kid have to do with your e-commerce business in 2012?

The answer comes from a recent report on enforcement of local rules from CSC. In “If Life Gives You Lemons, Make Lemonade (But You'd Better Have a Business License!)” (www.cscflash.com/article2.html), CSC expert Paul Hodnefield discusses many examples of “businesses” ' including, bizarrely, lemonade stands and dispensers of free water ' that have found themselves in trouble when they didn't comply with local licensing regulations.

While the parade of horribles in this story involved real-world firms, not law-school hypotheticals, the attraction of such enforcement against e-commerce firms seems obvious for cash-strapped local officials. Online firms usually have no local presence, and do not vote in local elections. Tech entrepreneurs receive little sympathy compared, for example, to the municipal jobs that can be preserved by collecting fines for violating local ordinances, whatever they may be. Moreover, just like the passing motoring tourist, who will lose more in time away from work to travel back to fight the ticket (even with a valid excuse), tech entrepreneurs will almost always find that the business and financial costs of defense far outweigh the practicality of just paying the fine, and moving on.

Being caught in a “regulatory speed trap” is never a winning situation for the regulated firm, online or off. In addition, consider all the risks of not settling after receiving the regulatory citation (which are just as much of a problem for traditional “bricks and mortar” firms doing business nationwide or through branch offices, as for e-commerce firms). For example:

• Contesting the local claims could hurt the company in adverse publicity;
• The opportunity cost of the executives' distraction from conducting business can eat up the thin profit margins that e-commerce firms typically generate;
• The potential costs of varying a firm's business practices from a uniform national model to meet local requirements can also eat up the time and energy of personnel, and the e-commerce firm's thin profit margin;
• Depending on the infraction, the out-of-pocket costs, with all fees and charges, can disrupt a budget for a start-up or small firm; and
• The violation may be of public record, available to competitors or vendors, and even have to be disclosed in securities filings (especially if it affects the eligibility of a key executive). Also, a licensing violation may lead to a temporary suspension of the license, which could be disruptive if the firm does not have anyone else readily available to step in.

In other words, targets of regulatory attention face a situation much like that of the speeding motorist in front of the local judge: Payment, rightly or wrongly, will cost far less than the accused trying to defend him ' or it ' self on the principle of the matter.

Despite these negatives, the risk of exposure for e-commerce firms to local holdups has perhaps increased, following Amazon.com's recent retreat in its nationwide sales-tax dispute. Absent a well-funded and prominent voice for the interstate commerce rights of firms that, by definition, do business nationally, to be free of certain state or local rules, the leverage local code enforcers can wield against online firms may grow as an unexpected fallout from the recent sales tax “armistice.”

Beginning on Sept. 1, 2012, Amazon.com dropped its resistance to local taxing authorities' assertions of sufficient nexus to require online firms to collect and remit sales taxes (see, “Pa. Sales Tax Push Puts Heat on Online Retailers,” San Francisco Chronicle, http://bit.ly/SOlWqF). (Of course, those firms always owed the same amount, as a use tax, but because they were required to pay it themselves, directly, online sellers generally refused to collect and remit the tax, and states rarely saw such funds.) But the “lack of nexus” defense pales in significance next to the practicalities of decentralized inventory shipping centers across the country. As a result, many online firms have begun to charge local sales taxes to online customers, rather than abandon their national presence, just to avoid the localities' claims of nexus, and, therefore, jurisdiction.

Presumably, the profits from e-commerce outweigh the cost of the additional taxes. (Not coincidentally, Amazon.com also began to build inventory warehouses to speed deliveries, since it no longer tries to claim exemption from sales-tax withholding obligations for lack of taxable nexus (see, “Amazon, Forced to Collect a Tax, Is Adding Roots,” Pittsburgh Post-Gazette, http://bit.ly/QM63Gb). From the jurisdictional perspective, that same physical presence in local jurisdictions provides the enforcement authority needed to assert regulatory claims against absentee defendants.

Long Arm of the Local Law

Consider the wide reach of local regulatory laws. A 2007 compilation of regulatory schemes, by the admittedly conservative activist Reason Foundation, showed hundreds of different categories of firms requiring local licenses. Thirty-three jobs require a license in all 50 states, and the study also compiles a lengthy list of “the nation's most outrageous licensing laws” (see, “Occupational Licensing: Ranking the States and Exploring Alternatives,” http://bit.ly/OPVfXe).

Although no single national compilation of regulatory rules exists, many websites provide access to a broad swath of potential sources of regulatory compliance rules. Municipal codes, for example, are linked at several sites, such as www.amle
gal.com/library.

Similarly, local ordinance links may be found at the following website addresses of these agencies and other enterprises:

• U.S. Small Business Administration. www.sba.gov/licenses-and-permits;
• About.com (part of The New York Times Co.). http://biztaxlaw.about.com/od/stateandlocalinformatoin/qt/localordinances.htm; and
• LLRX.com. A law-and-technology resource portal for lawyers, at www.llrx.com/features/ciguide.htm.

One entrepreneurial firm has even tried to cut through the chaff of local codes, and collect only the licenses most likely to be required for home based e-commerce firms (see, www.license123.com/Businesses/E-Commerce).

Different Perspectives

Also, local governments can now use a procedural tactic refined by the copyright-enforcement bar. Already, actions are routinely brought against hosting firms, and other “fixed” targets, that e-commerce firms cannot do without ' that can force an online firm to settle ' for practical and cost reasons. While such firms are truly “bystanders” to the dispute, their unwillingness to be drawn into an opportunity to enrich their lawyers can lead only to another source of pressure on e-commerce firms to bow to the regulators' will.

In fact, the burden of local regulatory enforcement on business growth has already been well studied, by another set of regulators (the Federal Trade Commission (FTC)), as well as by free-market proponents (who would abolish almost all regulation). The FTC's early studies, “Possible Anticompetitive Barriers to E-Commerce: Contact Lenses” (http://1.usa.gov/OXasWF) and “Possible Anticompetitive Barriers to E-Commerce: Wine” (http://1.usa.gov/S1WVxS), considered the effect of such rules on competition, rather than simply whether they were good business or not.

In fact, an academic symposium considered these issues from an antitrust perspective, rather than my concern of e-commerce operations, as e-commerce began to grow in the early 1990s (see, “Anticompetitive Barriers to e-Commerce: A Symposium,” http://bit.ly/Qeu47p). Separately, FTC testimony on these issues advocated elimination of local regulatory barriers, again on grounds of competition (see, http://1.usa.gov/QeuquS). Another similar study of the effects of application of real-world “health, safety and welfare” regulations to the online world involved something as down-to-earth as caskets ' which, not surprisingly, can be sold at deep discounts online, for those planning in advance (see, “Buried Online: State Laws That Limit e-Commerce in Caskets,” The Elder Law Journal, Vol. 14, p. 283; http://bit.ly/RRrGW4).

All these studies grew out of an FTC public workshop in 2002 on anti-competitive barriers to e-commerce in many two industries. The FTC studied the effect on e-commerce of local regulation in such fields as:

• Auctions;
• Automobiles;
• Caskets;
• Cyber charter schools;
• Online legal services;
• Real estate;
• Mortgages and financial services;
• Retailing; and
• Telemedicine and online pharmaceutical sales.

(www.ftc.gov/opp/ecommerce/anticompetitive/index.shtm)

The materials from the workshop include links to extensive studies on this subject, and include discussion of the burdens local regulation adds to e-commerce.

On the other hand, the early fears, such as in 2002, of such regulatory barriers to the growth of e-commerce now seem unwarranted, perhaps even optimistic, in light of e-commerce's impact on so many retail industries. In reality, online businesses have been formed and prospered regardless of the cost and burden of regulation, actual and theoretical. While the “lemonade stand” story was real, to my surprise I could not find the widespread horror stories of similar regulatory nightmares that I had expected to find (and as doom-and-gloom e-commerce prognosticators have warned of).

Yet if your business happens to be the one targeted by a local regulator, that nod to reasonableness may offer little comfort ' just ask the Nebraska “online home sale ad entrepreneur” who was pursued by the Nebraska Real Estate Commission in 2010 (see, “Online Home-Sale Ad Entrepreneur Sues Nebraska for Trying to Shut Her Down,” Pacific Legal Foundation, http://bit.ly/PUJESm). Having to pay legal fees to defend a regulatory claim doesn't get any less painful just because you know that it has not happened to many other firms (and, therefore, may be all the more galling to you).

Yet the law does offer hope, as summarized in a report by the Pacific Legal Foundation, which recently stated in a blog posting:

In recent years, federal courts have struck down various state licensing laws which required individuals to complete numerous hours of education that were unrelated to the trade in which they wished to practice. For example, a court struck down a law that required hair braiders to complete thousands of hours of irrelevant cosmetology training in order to braid hair. Another court struck down a state law requiring casket makers become licensed funeral directors in order to sell caskets. And another restricted a law requiring those who make their living trapping birds and rodents to complete hours of training in chemical pesticides. These courts understood that requiring burdensome irrelevant training in order to pursue a chosen occupation does nothing to protect the public, but instead merely protects existing favored businesses from competition. And courts have long recognized that protecting special groups from competition is not a legitimate purpose of government. As more and more business is conducted online, existing companies will push to find new ways to use government to silence their
competition.

(http://bit.ly/TryZoP)

Another example of the snares of local legislation affecting e-commerce arose with the adoption of state e-discovery rules that mandate rules very different from the federal rules (see, e.g., “State Supreme Court Adopts New Rules on e-Discovery, Rejects Federal Model, The Legal Intelligencer, June 8, 2012; http://bit.ly/LsK3wV).

The comments of one local attorney, Steve Finley, on Pennsylvania's own rules well summarize the local-law traps for online firms described in this article from all types of such rules, not just e-discovery standards, when they try to develop business models based on a national standard that simply may not be the law in a particular jurisdiction. To wit:

Because Pennsylvania has expressly rejected federal e-discovery law, Pennsylvania courts should be reluctant to, and pursuant to the commentary issued when the amendments were proposed, should refrain from, examining federal case law to resolve e-discovery disputes.

(“Pennsylvania Supreme Court Adopts E-Discovery Amendments to Pennsylvania Rules of Civil Procedure,” E-Discovery Law Alert, Aug. 9, 2012; http://bit.ly/NtD31i)

So much for cost-savings from developing expertise useful across the country.

In fact, the recent collection of sales tax in Pennsylvania by Amazon.com well illustrates the risks of inconsistent application of rules ' a particular risk in local taxation, where both rates, and what items or services, are taxable can vary, not only state-to-state, but even within a state; ask the owner of any convenience store near the Philadelphia city boundary whose suburban competitor literally across the street has a legally mandated 2% better deal because it is outside the city limits and can avoid paying city sales tax. For example, Amazon.com ' with all its resources and expertise ' still collected sales tax on shoes, even though they are not taxable in Pennsylvania, regardless of the rules elsewhere that are programmed into automated sales tax-collection software. (See, “Online Sales Tax Collection Poses Challenges for Pennsylvanians,” Pittsburgh Post-Gazette, Sept. 7, 2012; http://bit.ly/RS7eOY.) From a marketing perspective, what firm wants to see comments in the ubiquitous customer ratings at its website that it forces customers to pay taxes that do not apply?

What About the Rising Cloud?

If keeping up with local regulatory burdens seems impossible, consider the “cloud” obscuring the duties of specialized e-commerce providers (see, “Cloud Providers Struggle to Offer Regulatory Compliance,” Internet Evolution, http://bit.ly/PWvnES). Firms that choose to control costs by hiring online firms to outsource functions previously handled in-house, or by a real-world subcontractor, must be certain that the cloud provider complies with all applicable regulations for its own business, as well as the hosted one, whether those rules are federal, state, local or international. No one wants to be the person who recommended a cloud provider to save $10,000 per year, when the provider's failure to comply with applicable regulations leads to a fine many times that size.

Another aspect of the local regulatory burden faced by e-commerce firms has been highlighted in securities-offering documents of online firms. Amazon.com, for example, has for some time warned investors of that unknown expense:

Government Regulation Is Evolving and Unfavorable Changes Could Harm Our Business

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and electronic devices. Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts and other communications, consumer protection, web services, the provision of online payment services '. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content and web services. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business.

(10-K for the period ended Dec. 31, 2011)

Other online firms include similar warnings in their filings, from those as well-known as Barnes and Noble to more obscure ones such as Blue Nile, Amaru Inc. and Cape Coastal Trading Corp. Clearly, the securities bar has been attuned to the perils of local regulation for e-commerce firms, perhaps long before the industry considered it a risk (if it even does so now).

The New Is Old

On another note, as I have often observed in my columns on e-commerce, local compliance burdens, in general, are often no different than those faced by traditional businesses.

Long before the Internet was a realistic thought, it was expensive and burdensome for any business to review all ads and marketing materials for compliance with the patchworks of inconsistent laws in such areas as professional licensing, contests and marketing. Business leaders understood the need to spend money on local counsel to understand state blue-sky rules on soliciting investments, or on banking rules.

In contrast, the availability of e-commerce solutions in these fields may actually have made the research slightly less expensive and burdensome ' but it didn't take away the pain (and expense) of having to do it in the first place.

Remember: Speed Kills

In the real world, most of us slow down whenever we suspect a speed trap. Whether educated by the site of a lone police cruiser, a warning sign posted on an Internet discussion board, or simply the expensive lesson learned from paying a prior ticket, no one would seriously consider flouting such a restriction, especially when the penalties are near certain.

In e-commerce, in contrast, enforcement may be less predictable, because there are so many firms and jurisdictions. Yet for most firms, the approach should be no different than when approaching a speed trap: Slow down to follow the law.