Michigan on the Hunt: The Department of Treasury’s Nexus Enforcement Efforts

Recently, many direct marketers and online retailers received a letter from the Michigan Department of Treasury notifying them of the “carrot and stick” approach the Department of Treasury is taking regarding the enforcement of the Michigan sales and use tax, the Michigan Business Tax (“MBT”), which was adopted on January 1, 2008, and the Michigan Single Business Tax (“SBT”), a tax on gross receipts which was repealed effective December 31, 2007.

The carrot that Michigan has offered is not very big. If a company comes forward to sign a voluntary disclosure agreement, makes payment of taxes and interest for the four year period prior to the filing, and agrees to begin collecting and paying each of these taxes on a go forward basis, it is relieved of liability for penalties, and Michigan will limit its lookback period for tax and interest to four years prior to the filing. No tax, penalty, or interest would be due for any period prior to that.

What’s Next For Sales Tax (a/k/a Use Tax) On Direct Mail?

Direct marketers know that successful eCommerce strategies often depend upon reaching customers offline as well as online. Direct mail, including the distribution of catalogs, remains one of the most effective ways of driving traffic to a website. Indeed, given the reluctance of some consumers to give out their e-mail addresses, and the protections afforded consumers from unwanted solicitation under anti-SPAM, Do-Not-Call and other consumer privacy laws, traditional “snail mail” marketing techniques remain an important way for Internet sellers to communicate directly with customers.

Although several larger states (including California, New York, and Pennsylvania) provide exemptions from tax for certain types of direct mail, the vast majority of jurisdictions treat direct mail as taxable. And in all states, including those that provide exemptions, there are myriad other complex legal issues affecting taxability, including sourcing rules, taxability of postage, “direct mail” certificates, and nexus considerations, each of which make determining the proper sales tax treatment of direct mail transactions challenging. Add the fact that mailings go to recipients in many, if not all 50 states (and countless localities), each of which has its own tax law, and the difficulty of properly applying tax to any particular direct mail transaction multiplies exponentially.

Welcome Eyes on IP Readers

We'd like to thank the folks at our sister-blog, Eyes on IP, for their warm welcome to the world of blogging and for introducing us to all their readers.

To our new friends referred by Eyes on IP, we hope that you take some time to look around our blog and that you find something useful.  As we note in our introduction, our blog is devoted to providing legal insight to the world of eCommerce, including topics such as tax, privacy and data security, FTC compliance, state abandoned property laws, product safety, and consumer protection.  Please consider yourselves welcome, and let us know if you have any questions, comments, or feedback. 

To our faithful Eyes on Ecom Law readers, take a moment to check out our colleagues at Eyes on IP.  They provide a bird's eye view of the wide world of intellectual property...with an eye to how intellectual property matters to business.  Insights abound at Eyes on IP.

UPDATE: Our friends have moved -- you can now visit our sister blog at IP Wise.

Facebook: Not Just For Friends?

The Obama Administration is considering sending federal officers undercover on Facebook and other popular social networking sites. This effort raises a number of interesting questions, some legal, some not. For example, would the feds work with Facebook, or simply register, and silently patrol the social network looking for leads? If they went with the cooperative approach, just how much help could Facebook provide given its privacy policy and terms of use? Would it unlock the kingdom based upon an informal request, or would it require a subpoena or search warrant to comply? And, if the government decided to slip into the system without alerting Facebook, would it be required to follow Facebook's terms of use -- such as providing real names and contact information? What are the consequences if a person "tricks" someone into being their friend?

A confidential Department of Justice presentation obtained by the Electronic Frontier Foundation sheds some light on these issues, and also provides useful guidance in the crafting of privacy policies and terms of use by eCommerce companies, including those who provide social networks or online communities.

Think You’re Safe Storing or Releasing “Anonymized” Data? Think Again.

Anonymity is increasingly difficult to safeguard, and direct marketers that collect, maintain, share, and use customer information should take note of a recent class action settlement by Netflix than stemmed from the company's disclosure of an "anonymized" customer database.

Most federal and state privacy and data security statutes focus on the protection of "personally identifiable information," such as names, addresses, telephone numbers, financial account numbers, social security numbers, and email addresses. In response to such laws, many companies strip personally identifiable information from databases containing sensitive information. Once stripped of identifiers, the theory goes, the risks of identity theft or violations of consumer privacy rights resulting from disclosure of the data (whether purposeful or not) are eliminated. Some companies may even conclude that the data may be shared for marketing or "data mining" purposes without violating their privacy policies or applicable laws.

According to the Electronic Privacy Information Center, however, "computer scientists have revealed that this 'anonymized' data can easily be re-identified, such that the sensitive information may be linked back to an individual."

Gift Cards: The Sleeping Dog

Many of you may have read about the federal Credit Card Accountability, Responsibility, And Disclosure Act of 2009 (the “CARD Act”). While the CARD Act largely regulates the terms and conditions for credit cards, it also provides certain protections for purchasers of gift cards that will go into effect on August 22, 2010. But many people may not be aware that the CARD Act does not preempt or otherwise supersede state laws on gift cards, either before August 22 or afterwards.

There are many states that have gift card laws that bar the use of expiration dates on purchased gift cards, prohibit or set restrictions on imposing inactivity fees or other charges with regard to gift cards, and/or require disclosures regarding fees and expiration dates. Some of these laws are enforceable by the attorneys general of the states and/or through suits brought by consumers.

Thoughts from the NEMOA Spring Conference: Perils for Vendors from Affiliate Endorsements

Today was Day 3 of the New England Mail Order Association Spring Conference in Boston. It was a great conference with lots of opportunities for benchmarking and networking. A number of industry gurus were present, including George Michie from The Rimm-Kaufman Group, who gave a great talk on paid search issues that this lawyer found compelling.

Marty Eisenstein and I moderated a round table discussion on emerging online affiliate issues. There was quite a bit of interest in new FTC guidelines regarding testimonials and endorsements. These new guidelines have the potential to impact seriously a number of business practices that are quite common among reputable online merchants.

Colorado's HB 1193 Risks Constitutional Violations and Threatens Consumer Privacy

The assault on eCommerce by short-sighted state legislators and tax officials continues. By now, many of you have heard or read about the new Colorado law (HB 1193) enacted in February, that imposes certain sales tax notice and reporting obligations upon each “retailer that does not collect Colorado sales tax.” Under the law, most non-collecting retailers are required:

(a) beginning effective March 1, 2010, to inform their Colorado purchasers of the purchaser’s duty to remit use tax on certain purchases under Colorado law;

(b) beginning in January 2011, to provide Colorado purchasers an annual statement of all of their Colorado purchases from the retailer; and

(c) beginning in January 2011, to file annually with the Colorado Department of Revenue a list of all purchasers and the amount of their Colorado purchases.

Harmonized Sales Tax Expands to Ontario and British Columbia on July 1, 2010

In the past year, both Ontario and British Columbia entered into agreements with the Canadian federal government to harmonize the Goods and Services Tax (“GST”) and Provincial Sales Taxes (“PST”) into a single Harmonized Sales Tax or “HST.” The HST will be effective July 1, 2010, and will be administered by the Canada Revenue Agency (“CRA”).  Ontario and the federal government have already passed legislation implementing the HST.  British Columbia has yet to pass its own implementing legislation, but has already taken steps towards harmonization with the federal government.

LifeLock: $12 Million to Settle Data Security False Advertising Claims

The company whose advertising campaign included displaying their CEO's social security number on the side of a truck has reached a settlement to pay $12 million to the FTC and 35 states who charged LifeLock, Inc. with false representations about the effectiveness of its services. In an official press release, FTC Chairman Jon Leibowitz said that “[w]hile LifeLock promised consumers complete protection against all types of identity theft, in truth, the protection it actually provided left enough holes that you could drive a truck through it.”

But the case against LifeLock didn't end there. The FTC and the states also charged LifeLock with making false claims about its own data security practices. According to the FTC, LifeLock failed to live up to the following representations:

The WISP Has (Finally) Landed: MA's Data Protection Law Now In Effect

After a seemingly unending series of delays and modifications, Massachusetts's data protection regulation finally went into effect on March 1, 2010. A copy of the regulation can be obtained here. Unlike the data protection laws of most states, the Massachusetts regulation requires holders of data to put in place a comprehensive set of written measures to protect confidential information (also known as a "WISP," or “written information security policy”), and to update their WISPs on an annual basis. The required contents of the WISP are outlined in the regulation, and cover topics ranging from encryption to vendor agreements.

Thumbnail: The new regulation applies to all persons and companies who either own or license personal information about residents of Massachusetts, and applies both to electronic and paper records. While the opening clause of the regulation appears to limit its coverage to "customer information" and "consumers," the balance of the regulation does not distinguish between information about customers, consumers, employees, or other categories of persons. If past experience with the administrative process in Massachusetts is any guide, it will be a long and winding road before we get any formal guidance as to the regulation’s scope.

“Amazon Affiliate Nexus” Statutes: A Business-Savvy Alternative

Tax and trade journals report about each new state that is considering adopting an “Amazon Affiliate Nexus” statute, patterned after the New York statute adopted in 2008. As of this writing, North Carolina and Rhode Island have each enacted a New York-type online affiliate nexus statute, and several other states, including California, Connecticut, Illinois, Maryland, Minnesota, Tennessee, Vermont and Virginia are considering whether to adopt similar statutes. Should an online retailer discontinue its affiliate relationships in those states? Should the online retailer begin collecting and remitting sales and use tax in states with such statutes even where it has no physical presence? Should the online retailer challenge the statute in court by suing the state and disputing the constitutionality of the statute, as was done by Amazon.com and Overstock.com in New York? There are clearly problems with each approach. If the retailer elects to discontinue its online affiliate relationships, the retailer may hurt its business. Besides, the retailer may not have identified all of its affiliates, each of which contributes to a presumption of nexus under the statute, and thus may face a risk of nexus in any event. On the other hand, a retailer’s collection of the sales and use tax means remitting the sales and use tax on all of its sales in the state, even if the affiliate-generated transactions are only a small percentage of its sales. Least attractive of all may be the litigation approach, which can take a long time to reach resolution and which has an uncertain outcome.

Welcome to Eyes on eCom Law

Welcome to Eyes on eCom Law, a blog devoted to providing legal insight to the world of online and direct marketing. The attorneys at Brann & Isaacson have been advising direct marketers on all aspects of their businesses for more than 35 years, and have served as Tax Counsel for the Direct Marketing Association for the past 20 years. As direct marketing has evolved from traditional mail order to online and multi-channel marketing, we have continued to guide clients through an ever-changing landscape of legal issues. We know firsthand that both "pure-play" online and multi-channel direct marketers face their own set of unique legal challenges in areas such as tax, privacy and data security, Federal Trade Commission compliance, state abandoned property laws, intellectual property, product safety, and consumer protection.

With our breadth of practice and depth of experience, Brann & Isaacson has the expertise necessary to identify and explain the significance of new legal developments relevant to eCommerce. For "e-tailers" of every size and business model, it can be a difficult task to navigate eCommerce’s myriad legal intricacies. We hope that this blog will serve as a resource to help the direct marketer manage its business and to make sense of the legal developments and challenges (and even opportunities) facing the industry. Please feel welcome to ask questions, make comments and send us feedback!