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State officials look at new rules for e-commerce

State regulators say that e-commerce needs to be governed and they have a central role in the rule-making process--if only to head off future federal rules.

The Internet is supposed to defy geographical boundaries, but no one seems to have told that to state governments.

Even as the federal government has taken a largely laissez faire position on regulating e-commerce, state officials from Alaska to North Carolina have started to take a more hands-on approach. State regulators say that e-commerce needs to be governed and they have a central role in the rule-making process--if only to head off future federal rules.

"If we can get by without federal preemption, we're better off," said Gene Lebrun, a member of the Congressional Advisory Commission on Electronic Commerce.

Among the latest state actions to regulate e-commerce:

  • Virginia Gov. James Gilmore, backing off from an earlier proposal to ban taxes on Internet sales permanently, recently proposed that Congress place a 5-year moratorium on such taxes. Meanwhile, Michigan has added an area to its state tax return where residents must declare and pay taxes on their Internet and mail-order purchases.

  • Earlier this month, Texas issued new rules governing automobile sales, restating that it is illegal to sell cars in the state (or receive referral fees on such sales) without a state license. While some online auto dealers have taken steps to comply with the rules, others have decided not to sell cars in Texas for the time being.

  • Also this month, a Virginia winery sued New York state in U.S. District Court over its law prohibiting direct sales of alcohol to state residents. New York is one of almost 30 states to ban such sales, and it is the fifth state to be sued over the law.

  • In the last several months, states including California, Alaska, Iowa and Wisconsin have begun to crack down on online cigarette sales. Those states and others have asked that online cigarette stores turn over their customer lists, and they have begun to pursue residents for outstanding taxes.

  • In December, North Carolina's Auctioneer Licensing Board proposed extending its rules governing offline auctions to cover the resale of items on eBay, Yahoo and other sites. The board has since backed off and asked the state's attorney general for an opinion on the issue.

    The actions come as e-commerce takes a growing stake in the national economy. Forrester research estimates that online retail sales will grow from $38.8 billion this year to $184.5 billion in 2004. The latter figure represents about 7 percent of the projected total of U.S. retail sales for that year.

    A study late last year by Jupiter Communications indicates that the large majority of online sales are coming at the expense of sales at traditional stores. With a growing portion of the economy shifting online, state officials have worried publicly about everything from having to cut state services because of the loss of sales tax revenue to the need to protect citizens from unscrupulous auction sellers.

    Playing watchdog for their citizens is a legitimate role for states, many analysts say. But the Internet raises questions about jurisdiction and enforcement, especially when consumers are buying items via out-of-state or international companies. And some analysts question whether state regulations over areas such as automobiles and alcohol are really protecting local businesses from competition under the guise of consumer protection.

    "The question is whether states can have any impact (with their regulations, or) whether they aren't just a thinly veiled way to capture revenue," Gomez Advisors analyst Alan Alper said.

    Instead of complying with complicated state rules, many companies may simply skip sales in certain states. CarsDirect.com, for instance, does not sell cars in Texas, Arkansas or Wisconsin because those states have made it difficult for online companies to sell cars directly to their residents.

    "Texas is a significant market, but there's a lot of market out there," said CarsDirect.com spokeswoman Wendy Barbour. "The major markets for us are California, New York and Florida."

    Many consumers nationwide have expressed frustrations with buying cars through dealerships and many are turning to auto Web sites in response. Through its actions, Texas is preventing residents from enjoying the same benefits of citizens in other states.

    "Any of these rules where you are trying to build fences around e-commerce, especially forms of e-commerce within a state, are just bound to fail given the pervasive and boundary-less nature of the Internet," said James Vogtle, e-commerce research director for Boston Consulting Group.

    Lebrun, who is an adviser to the National Conference of Commissioners on Uniform State Laws (NCCUSL) and South Dakota's former Speaker of the House, argues that the best method for regulating e-commerce would be for the states to work through an organization such as NCCUSL to create rules that would be drafted for all 50 states. The organization has already helped regulate traditional commerce through the widely adopted Uniform Commercial Code.

    "It doesn't take long for states to adopt (such laws); it's like getting on the bandwagon," Lebrun said.