Monday, April 4, 2011

Sales Tax on Amazon: An Example of the Difficulties of Internet Enforcement

Amazon Logo
On March 28th, I published an article on the difficulties of the enforcement of the right to be forgotten. The first point I made concerned personal jurisdiction.'s struggle to avoid collecting (state) sales tax stands as a great example of the issues of personal jurisdiction regarding internet sites.

Happily, Verne Kopytoff, writing for the New York Times, points out a Supreme Court case on point, Quill Corp. v. N. Dakota By & Through Heitkamp, 504 U.S. 298 (1992). Kopytoff doesn't get the personal jurisdiction framework quite right, a state has personal jurisdiction over a those corporations which have "certain minimum contacts" such that the suit "does not offend 'traditional notions of fair play and substantial justice.'" (International Shoe Co. v. Washington, 326 U.S. 310 (1945)). In essence, any corporation which engages in "systematic and continuous" activities within a state can be subject to that state's jurisdiction. (See cases following Int'l Shoe, particularly, Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997), for more information). What this means for internet retailers is not clear. The law of personal jurisdiction for internet retailers is very confusing. The law in one area of the country can be very different from another area. This presents one difficulty with enforcing anything regarding the internet or internet transactions.

Nevertheless, states seem to have accepted that, at present, they cannot tax Amazon itself (except for where Amazon has offices). States can tax their own citizens, however. So, a handful of states have enacted laws to tax 'Amazon Affiliates.' For the most part, Amazon has severed ties with Affiliates in those states to avoid collecting taxes.

In short, Amazon has been doing what I suggested websites would do. It is removing itself from the jurisdiction of those states. As a result, those states cannot enforce their laws.

In the case of Amazon, and other online retailers, removal hurts the states. As George Runner points out in the Times article, affiliates are, for example, Californians who sell products online. Not all buyers are Californians. In fact, buyers could be from anywhere. If we use a Fermi problem to estimate the amount of money coming into California from other states as a result of those sales we find that roughly $302.4 million flowed into California in 2010 as a result of Amazon Affiliates. (We assume (1) $15 billion in sales were made the the U.S. (based on a total of $18.707 billion in North America), (2) sales are proportionate to population (CA holds ~12% of the nations population), (2) 20% of sales are generated by Affiliates (no basis), (4) Affiliates get to keep 84% of sales generated (average for Affiliate program item + referral fee)). Assuming online retail accounts for 3.4% of sales that means California saw a total influx of $291.8 million in 2010 due to Amazon sales.

If we then use a Fermi problem to estimate the revenue generated by Amazon Affiliates for the State of California we discover that California collects ~$14 million. (We assume (1) Affiliates don't report sales as income, (2) Californians spend their money the same way as everyone else (and this chart is accurate), (3) The aggregate sales tax is 10% (Based on CA Board of Equalization numbers). Note that I didn't break down the amount past initial sales, i.e. what the sellers of products to Affiliates buy and how much of that goes to the State). $14 million is a lot of money for one company to be generating for one state. Unfortunately for California, if Amazon severs ties with its Affiliates none of that money will be flowing into the state.

The Times article also talks about an interesting strategy Amazon has adopted regarding its "presence" in a state. Amazon avoids having to collect taxes in states where it might be deemed to have a "presence" by assigning ownership of its warehouses to a subsidiary. In Texas that strategy is running into a bit of a problem. Comptroller Susan Combs has sent Amazon a $269 million tax bill. While Governor Rick Perry (R) is still trying to moderate the dispute Amazon has decided to close its Texas warehouse, effectively leaving the state.

According to the Times, lawmakers in several states are "trying to broaden the definition of physical presence in the state to include partner sites of all retailers, not just Amazon." No word yet on if lawmakers are also trying to broaden the definition of physical presence in the state to include more activities in order to try to force online retailers to collect sales tax.

If lawmakers do try to broaden the definition of physical presence it will be interesting to see what kind of Constitutional question arises and what impact that would have on other areas of 'internet law.'

Saturday, April 2, 2011

White v. Samsung: An American Basis for a Right to Be Forgotten?

[Author's Note: White isn't the only possible American basis for a right to be forgotten]

Recently, there has been some push in Congress for some kind of bill to give internet users greater privacy rights. First, we saw Senator Leahy (D-VT) and Hatch (R-UT) release S.3804: Combating Online Infringement and Counterfeit Act (COICA). (While COICA does not explicitly address privacy concerns it broadens the ability of U.S. based law enforcement to engage with internet actors). Then, just a few weeks ago, Senator Kerry (D-MA) released a draft of a new privacy bill. Kerry's as-of-yet unnamed privacy bill has several provisions similar to the broad outlines of the European right to be forgotten. (Infosec Island has a great plain language summary of Kerry's bill).

These movements in Congress may provide a new, federal, basis for an American right to be forgotten. But, even without new federal involvement, there is some basis in White v. Samsung Electronics America, Inc., 989 F.2d 1512 (9th Cir. 1993), to infer a future the rise of an American right to be forgotten.

Vanna White Ad
White v. Samsung stands as a core basis for the right of publicity. In White Vanna White sued Samsung for running an advertisement that showed a robot doing her job on what appeared to be the set of Wheel of Fortune. The 9th Circuit, over Judge Kozinski's dissent, held Samsung liable. Judge Kozinski, in his dissent, argues that "every famous person now has an exclusive right to anything that reminds the viewer of her." While it is not clear the 9th Circuit's expansion of the right of publicity was that broad the 6th and 10th Circuits have found cause to agree with Judge Kozinski. (ETW Corp. v. Jireh Pub., Inc., 332 F.3d 915 (6th Cir. 2003); Cardtoons, L.C. v. Major League Baseball Players Ass'n, 95 F.3d 959 (10th Cir. 1996)). Both the 6th and 10th Circuits note that the holding in White has significant interplay with the First Amendment.

What does all this mean for the internet? It's hard to say. But, it's possible that, at least in the 9th Circuit, a court might find cause to expand the right of personality to the everyday internet user, specifically in the commercial context. As a result, those pesky tailored ads might violate the user's rights, especially if they specifically incorporate information about the user.

Tailored Ads
Tailored ads are a difficult issue to tackle. On one hand, tailored ads are economically efficient. Companies are willing to pay more money to make sure their target demographic hears their message. Advertising engagement rings to married people, for instance, is a waste of money. Married people don't need and won't buy engagement rings. Being able to target unmarried men in committed relationships, however, would be a goldmine for Zales, Kay, Jarred, and every other jewelery company. And, consumers would probably like advertising more (or, inversely, hate advertising less) if they were only exposed to advertisements that were relevant to them. So it only makes sense that the push for tailored ads continues to gain ground.

On the other hand, Minority Report-esque ads are deeply disturbing. But companies seem determined to make those ads a reality. See the Corning's ad below:

There's something a little chilling about walking into a store and having a robotic customer service agent recognize you. It makes sense that there would be push back against this form of technological change.

While White alone seems to provide good cover for internet user's right to be forgotten as far as advertisers go it doesn't really cover non-commercial transactions. In non-commercial transactions, the extent of the basis for a right to be forgotten depends on the legal theory under which the internet is approached. Courts may follow the 6th and 10th Circuits and use a 'speech' based theory or they may follow a 'property' theory like the New Hampshire Supreme Court in State v. Nelson, 150 N.H. 569, 571, 842 A.2d 83, 85 (2004). (There are, of course, other theories about digital "things" but I won't address them here. For further reading about "things" see Michael J. Madison, Law As Design: Objects, Concepts, and Digital Things, 56 Case W. Res. L. Rev. 381, 385 (2005)).

A property theory, as in Nelson, depends on the categorization of "things" on the internet as property, rather than "speech." In essence, content is chattel. In non-legalese, that means that the content you post to the web is something you "own" like your car. If someone comes and takes your car without your permission you can sue them. It is your car and, generally, you can control who uses it. Essentially, Nelson said the same thing except about photographic content. The defendant, Nelson, took several photographs laying on top of a dresser and copied them. The court found that the owner of the photographs had a property right in the content of the photographs.

While Nelson was a criminal case the reasoning seems applicable to civil cases as well. But, it is not clear how far that reasoning extends. Does it include just photographs (and, presumably, videos (which are just a series of photographs)) or does it include other kinds of content as well?

Even if Nelson includes other content it only protects content that users own. So, when Nelson is cobbled together with White internet users would only have a right to be forgotten insofar as commercial entities and misappropriation of content is concerned. Cyber-Bulling Statutes might expand that right to some degree but even with their inclusion information published about someone would not necessarily be subject to forgetfulness. At its extreme, the patchwork of rights established by White are still much more limited than the European Union's (EU's) right to be forgotten. The central concern at the heart of the EU's right to be forgotten, the publication of content about a person is not really addressed by this line of cases.