May 29, 2009, 12:00 AM

What Obama means for e-commerce

The first BlackBerry-wielding president is likely to have a bigger impact on Internet retailing than his predecessor. Here’s how.

By Don Davis

Online retailing came of age during the White House tenure of George W. Bush whose hands-off approach to business meant Washington’s policies had little effect on e-commerce. That’s likely to change with Barack Obama as president.

In part that’s because Obama has pledged action on several issues affecting e-commerce, including online privacy and extending broadband Internet access. But the bigger reason is that the economic crisis has led government, even before Bush left office, to take a more activist role.

The commitment to jump-start the economy prompted the passage within weeks of Obama’s inauguration of stimulus legislation that includes billions to push broadband web access to parts of the country where it’s not available. And the need of cash-starved state governments for new revenue sources will be a big part of the upcoming debate on legislation to allow states to require e-retailers to collect sales taxes.

The sales tax proposal has e-commerce executives worried. And some were concerned by Obama’s most significant Internet-related move to date, the appointment of a vocal privacy advocate, Jonathan Leibowitz, to head the Federal Trade Commission.

That’s prompted fears the FTC will put new restrictions on how online marketers can use data to target consumers with ads and offers. But Jordan Cohen, senior director of industry relations at e-mail service certification provider Goodmail Systems Inc., says the administration is unlikely to do anything to stifle Internet investment and growth.

“We have a tech-savvy president who’s interested in technology and wants to promote innovation,” Cohen says. “While he has an interest in consumer protection, it will be balanced. The government wants to make sure businesses can grow.”

Online sales tax

But Obama also wants to make sure the states can pay their bills. And that is likely to bring to the fore in the coming months the issue most likely to change Internet retailing: an online sales tax.

While Obama has not addressed the issue directly, many e-commerce executives are fearful there may be more bipartisan support than in the past for a bill that would allow states to require all e-retailers, not just those with operations in a given state, to collect sales tax.

This legislation is more likely to pass because of the economy, says Daniel Schibley, senior analyst at CCH Inc., a unit of Wolters Kluwer that provides tax and business law information and software.

“While it’s not a partisan issue, Democrats generally are more likely to be supportive than Republicans, and the increased Democratic majorities will probably help,” Schibley says. “Probably more important given the economic situation, it’s a way the federal government could help states raise more revenue without apportioning money from the federal budget.”

Advocates of online sales tax are optimistic. “We have a better scenario with the current leadership in the House and Senate and the White House, coupled by the fact that state and local governments are suffering significant budget shortfalls,” says Maureen Riehl, vice president and government and industry relations counsel for the National Retail Federation. “President Obama and the congressional leadership have indicated a desire to be helpful to state government.”

NRF, whose membership includes big retail chains, supports the sales tax legislation as a way to eliminate the price advantage online retailers enjoy when consumers don’t pay sales taxes on online purchases. Although consumers technically are supposed to pay sales tax on online purchases to their home states, few do, making the unpaid sales tax a discount off of the price that would be paid in a store.

Riehl says legislation to be introduced this spring would enable states to require out-of-state web merchants to collect sales tax once the states bring their sales tax laws into compliance with a set of rules called the Streamlined Sales Tax Agreement. Those SST rules were developed in response to retailer complaints that it would be too difficult to know how much to charge each consumer when thousands of state and local jurisdictions have their own sales tax rules. For instance, some charge tax on clothing and food, while others do not.

To date, 22 of the 45 states that charge sales tax have brought their rules into compliance with SST, with Wisconsin applying to become the 23rd, Riehl says. Most SST-compliant states would have to make minor modifications to meet the requirements of the federal bill, but then could start requiring tax collection immediately if the bill were to pass, Riehl says. The average state sales tax is 6%, and several states are in the process of raising that tax in response to the recession.

Having to charge sales tax would hurt Internet retailers, says Ken Burke, chairman of e-commerce technology provider MarketLive. “Saving the tax made it cost-neutral for the consumer to pay for shipping,” Burke says. “It will hurt online retailing and make it harder to compete.”

Target: behavioral targeting

Obama, while not yet addressing the sales tax message publicly, sent a clear message on privacy by appointing Leibowitz to chair the Federal Trade Commission, which oversees rules on how online marketers can use data collected from web users.

Leibowitz, an FTC commissioner since 2004, reiterated his support for strong privacy policies in February, just weeks before Obama promoted him to chairman.

In commenting on the FTC’s latest report on online advertising, Leibowitz said, “Industry needs to do a better job of meaningful, rigorous self-regulation or it will certainly invite legislation by Congress and a more regulatory approach by our commission. Put simply, this could be the last clear chance to show that self-regulation can-and will-effectively protect consumers’ privacy in a dynamic online marketplace.”

Online marketers took heart from the fact Leibowitz emphasized self-regulation, instead of new legislation. “While it’s true he’s a privacy advocate, he’s also realistic about the Internet, that it’s changing constantly and needs to be kept free and open,” says Linda Woolley, executive vice president for government affairs at the Direct Marketing Association.

A key issue in the online privacy debate is behavioral targeting, the practice of showing ads or making offers to online consumers based on their behavior on web sites. For instance, a retailer might place a cookie on the computer of a visitor who views a flat-screen TV product page, so that an advertising network can present that consumer the retailer’s ad for TVs on another web site.

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