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Electronic Commerce Tenth Edition Chapter 7 The Environment of Electronic Commerce: Legal, Ethical, and Tax Issues.

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1 Electronic Commerce Tenth Edition Chapter 7 The Environment of Electronic Commerce: Legal, Ethical, and Tax Issues

2 Electronic Commerce, Tenth Edition22 Learning Objectives In this chapter, you will learn: How the legal environment affects electronic commerce activities What elements combine to form an online business contract How copyright, patent, and trademark laws govern the use of intellectual property online That the Internet has opened doors for online crime, terrorism, and warfare

3 Learning Objectives (cont’d.) How ethics issues arise for companies conducting electronic commerce Ways to resolve conflicts between companies’ desire to collect and use their customers’ data and the privacy rights of those customers What taxes are levied on electronic commerce activities Electronic Commerce, Tenth Edition3

4 4 The Legal Environment of Electronic Commerce All businesses: –Must comply with the same laws and regulations –Face the same set of penalties Web businesses face additional complicating factors –Web extends reach beyond traditional boundaries Subject to more laws more quickly than brick-and- mortar business –More interactive and complex customer relationships Due to increased communications speed and efficiency

5 Electronic Commerce, Tenth Edition5 The Legal Environment of Electronic Commerce (cont’d.) Online communications –Facilitate strategic alliances and supply web relationships Web creates network of customers –Significant levels of interaction (with each other) Implications of violating law or breaching ethical standards –Web businesses face rapid, intense reactions from customers and stakeholders

6 Electronic Commerce, Tenth Edition6 Borders and Jurisdiction Physical world of traditional commerce –Territorial borders clearly: Mark range of culture Mark reach of applicable laws Physical travel across international borders –People made aware of transition through: Formal document examination Language and currency change

7 Electronic Commerce, Tenth Edition7 Geographic influences of area’s dominant culture –Limit acceptable ethical behavior and laws adopted Culture affects laws directly and indirectly –Through its effect on ethical standards FIGURE 7-1 Culture helps determine laws and ethical standards © Cengage Learning 2013

8 Electronic Commerce, Tenth Edition8 Borders and Jurisdiction (cont’d.) Geographic boundaries on culture –Historically defined by lack of distant travel –Today people travel easily between countries Example: European Union citizen movement and use of common currency (the euro) Relationship between geographic and legal boundaries –Defined by four elements Power, effects, legitimacy, notice

9 Electronic Commerce, Tenth Edition9 Borders and Jurisdiction (cont’d.) Power –Form of control over: Physical space People and objects residing in physical space –Defining characteristic of statehood –Effective laws require effective enforcement –Effective enforcement requires ability to: Exercise physical control over residents Impose sanctions on violators

10 Borders and Jurisdiction (cont’d.) –Jurisdiction Government’s ability to exert control over a person or corporation –Physical world laws do not apply to people: Not located in or not owning assets in geographic area that created laws –Asserted government power level Limited by existing culture acceptance –Ideally Geographic boundaries, cultural groupings, legal structures all coincide Electronic Commerce, Tenth Edition10

11 Borders and Jurisdiction (cont’d.) Effects –Physical world laws Grounded in relationship between physical proximity and effects (impact) of person’s behavior –Diminish as geographic distance increases –Local culture’s acceptance or rejection of various kinds of effects: Determines characteristics of laws –For online businesses: Traditional measures, resulting laws do not work well Example: online Nazi memorabilia sales Electronic Commerce, Tenth Edition11

12 Electronic Commerce, Tenth Edition12 Borders and Jurisdiction (cont’d.) Legitimacy –1970 United Nations resolution Affirmed idea of governmental legitimacy –Legitimacy Idea that those subject to laws should have some role in formulating them –Countries and governments Operate with varying levels of authority and autonomy Example: China and Singapore versus Scandinavian countries

13 Electronic Commerce, Tenth Edition13 Borders and Jurisdiction (cont’d.) Notice –Physical boundaries provide notice (when crossed) One rule set replaced by different rule set –Expression of such a change in rules –Constructive notice People informed of subjection to new laws and cultural norms: crossing international border Ignorance of law: not sustainable defense Creates problems for online businesses: unknown customers from another country accessing Web sites Poor translation to online business

14 Electronic Commerce, Tenth Edition14 FIGURE 7-2 Physical geographic boundaries lead to legal boundaries © Cengage Learning 2013

15 Electronic Commerce, Tenth Edition15 Jurisdiction on the Internet Difficult –No geographic boundaries –Power, effects, legitimacy, and notice Do not translate well to e-commerce Governments enforcing Internet business conduct laws: –Must establish jurisdiction over conduct Contract –Promise between two or more legal entities Provides for exchange of value between them

16 Electronic Commerce, Tenth Edition16 Jurisdiction on the Internet (cont’d.) Breach of contract –Occurs if either party does not comply with contract terms Other party can sue (failure to comply) Tort –Intentional (negligent) action taken by a legal entity Causing harm to another legal entity Other than breach of contract Sufficient jurisdiction requires: –Subject-matter jurisdiction and personal jurisdiction

17 Electronic Commerce, Tenth Edition17 Jurisdiction on the Internet (cont’d.) Subject-matter jurisdiction –Court’s authority to decide particular dispute type –United States examples Federal courts: subject-matter jurisdiction over issues governed by federal laws State courts: subject-matter jurisdiction over issues governed by state laws –Rules determining subject-matter jurisdiction Clear and easy to apply (few disputes)

18 18 Jurisdiction on the Internet (cont’d.) Personal jurisdiction –Determined by residence of parties –If defendant is a state resident where court located Straightforward determination –An out-of-state person or corporation can voluntarily submit to a state court jurisdiction –Forum selection clause Statement included in a signed contract Indicates contract enforced according to particular state laws Electronic Commerce, Tenth Edition 18

19 Electronic Commerce, Tenth Edition19 FIGURE 7-3 A typical forum selection clause

20 Jurisdiction on the Internet (cont’d.) –Long-arm statutes: state laws creating personal jurisdiction (details vary) Create personal jurisdiction over nonresidents committing tortious acts –Businesses conducting e-commerce over state and international lines Be aware of jurisdictional considerations –Extent to which these laws apply: unclear Procedural laws written prior to electronic commerce Continue to evolve as electronic commerce disputes arise Electronic Commerce, Tenth Edition20

21 Electronic Commerce, Tenth Edition21 Jurisdiction on the Internet (cont’d.) –Tortious acts Represent exceptions to general rule determining personal jurisdiction Committed by selling product causing harm to buyer –Negligent tort Seller unintentionally provides a harmful product –Intentional tort Seller knowingly or recklessly causes injury to buyer

22 22 Jurisdiction on the Internet (cont’d.) –Most common business-related intentional torts Defamation, misrepresentation, fraud, trade secret theft –Long-arm statutes Invoked more readily for tortious acts compared to breach of contract Electronic Commerce, Tenth Edition22

23 Electronic Commerce, Tenth Edition23 Jurisdiction on the Internet (cont’d.) Jurisdiction in international commerce –Governed by treaties between countries –U.S. determines personal jurisdiction for foreigners Same manner as in domestic long-arm statutes –Non-U.S. corporations and individuals Can be sued in U.S. courts Foreign courts can enforce U.S. court system decisions against U.S. corporations, individuals –Judicial comity Voluntarily enforce other countries’ laws out of sense of comity (friendly civility)

24 Electronic Commerce, Tenth Edition24 Jurisdiction on the Internet (cont’d.) –Courts reluctant to serve as forums for international disputes Not designed for diplomacy, cost-benefit evaluations Prefer government executive branch to negotiate international agreements, resolve international disputes –Examples: eBay and Google in China Some assert Chinese government involved in failures –Online resources Berkman Center for Internet & Society UCLA Online Institute for Cyberspace Law and Policy

25 Conflict of Laws Business governed by various laws –Federal laws, state laws, local laws Conflict of laws –When laws address same issues in different ways Online businesses span many localities, states –Look to federal laws for guidance May lead to problems with state and local laws Example: direct wine sales industry More information: Free the Grapes –Web site of a wine industry trade association Electronic Commerce, Tenth Edition25

26 Electronic Commerce, Tenth Edition26 Contracting and Contract Enforcement in Electronic Commerce Three essential contract elements –An offer, an acceptance, consideration Contract formed when one party accepts offer of another party Offer –Commitment with certain terms made to another party Can be revoked Acceptance –Expression of willingness to take offer including all stated terms

27 Electronic Commerce, Tenth Edition27 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Consideration –Agreed-upon exchange of something valuable Money, property, and future services Implied contract –Formed by two or more parties acting as if contract exists Even if no written and signed contract

28 Electronic Commerce, Tenth Edition28 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Creating contracts: offers and acceptances –Contract Exists for every kind of agreement or exchange between parties (no matter how simple) Example: consumer buying an item at the supermarket Key element of traditional and Internet business –Internet communication offers and acceptances Occur by exchanging , engaging in EDI, and filling out Web page forms Can be combined with traditional methods

29 29 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Creating contracts: offers and acceptances (cont’d.) –Consumer’s contract to buy goods Same basic elements: in-person and online –Resource Cornell Law School Web site –Contains Contracts Uniform Commercial Code (UCC) Electronic Commerce, Tenth Edition29

30 FIGURE 7-4 Contracting process in an online sale Electronic Commerce, Tenth Edition30 © Cengage Learning 2013

31 31 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Click-wrap and Web-wrap contract acceptances –End-user license agreements (EULAs) Contract user must accept before installing software –Shrink-wrap acceptance Accepting a contract by removing plastic shrink wrap –Click-wrap acceptance Agree to site’s EULA or its terms and conditions by clicking a button on the Web site –Web-wrap acceptance or browser-wrap acceptance Accept by simply using the Web site Electronic Commerce, Tenth Edition31

32 32 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Creating written contracts on the Web –Contracts valid even if not in writing or signed May not be enforceable in certain categories –Statute of Frauds (state laws) Categories of contracts not enforceable unless terms put into writing and signed Applies to sale of goods worth more than $500 Requires that actions not completed within one year must be created by a signed writing Electronic Commerce, Tenth Edition32

33 Electronic Commerce, Tenth Edition33 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Creating written contracts on the Web (cont’d.) –Forming contracts using electronic commerce Pen or paper not required (fortunately) –Writing exists: When contract terms reduced to tangible form –Signature Any symbol executed or adopted for the purpose of authenticating a writing

34 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Creating written contracts on the Web (cont’d.) –Article 11 of the United Nations Convention on Contracts for the International Sale of Goods (CISG) Requires neither writing nor a signature to create a legally binding acceptance –Information on CISG and related topics in international commercial law Pace Law School CISG Database Web site Electronic Commerce, Tenth Edition34

35 Electronic Commerce, Tenth Edition35 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Implied warranties and warranty disclaimers on the Web –Implied warranty Promise to which the seller can be held even though the seller did not make an explicit statement of that promise –Law establishes these basic elements of a transaction in any contract to sell goods or services –Warranty disclaimer Statement declaring that the seller will not honor some or all implied warranties

36 Electronic Commerce, Tenth Edition36 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Implied warranties and warranty disclaimers on the Web (cont’d.) –Warranty disclaimer must be conspicuously made in writing Put in larger type, bold font, or contrasting color State it obviously Make it easy for buyer to find on Web site

37 Electronic Commerce, Tenth Edition37 FIGURE 7-5 A Web site warranty disclaimer

38 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Authority to form contracts –Contract formed when offer accepted for consideration –Problems with acceptance Issued by imposter (forgery) Improper authority to bind company to a contract –Electronic commerce technology Makes forged identities easy to create Also provides means to avoid deception –Establish identity in online transactions Use digital signatures Electronic Commerce, Tenth Edition38

39 Electronic Commerce, Tenth Edition39 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Authority to form contracts (cont’d.) –Authority to bind Authority to commit company to online contract Example: employee accepts contract, company later asserts employee not authorized –In physical world transactions: Check public information on file Obtain copies of corporate certificates or resolutions –In online transactions: Physical world methods can be time consuming and awkward

40 Electronic Commerce, Tenth Edition40 Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Terms of service agreements –Site visitors must follow stated rules Most visitors not aware of rules –Terms of service (ToS) agreements Detailed rules and regulations Limit Web site owner’s liability for what one might do with site information –Site visitor held to terms of service by simply using site

41 Electronic Commerce, Tenth Edition41 FIGURE 7-6 Yahoo! Terms of Service agreement Copyright © 2012 Yahoo! Inc. All rights reserved

42 Electronic Commerce, Tenth Edition42 Use and Protection of Intellectual Property in Online Business Intellectual property (general term) includes: –All products of the human mind Tangible or intangible –Protections afforded by copyrights and patents, trademarks registration, service marks Right of publicity –Limited right to control others’ commercial use of an individual’s name, image, likeness, identifying aspect of identity –Limited by U.S. First Amendment provisions

43 Electronic Commerce, Tenth Edition43 Use and Protection of Intellectual Property in Online Business (cont’d.) Online businesses must avoid: –Deceptive trade practices –False advertising claims –Defamation or product disparagement –Infringements of intellectual property rights By using unauthorized content

44 Copyright Issues Copyright –Right granted by government to the author (creator) of literary or artistic work Specific time length provided in copyright law –Gives author (creator) sole and exclusive right to the work (print, publish, sell) –Includes virtually all forms of artistic or intellectual expression Electronic Commerce, Tenth Edition44

45 Electronic Commerce, Tenth Edition45 Copyright Issues (cont’d.) Idea contained in an expression –Cannot be copyrighted Requirement –Idea must be separate from expression –Example: mathematical calculations Collection of facts –Can be copyrighted –Example: Yahoo! Web Directory

46 Electronic Commerce, Tenth Edition46 Copyright Issues (cont’d.) U.S. law still allows registration (no longer required) Work created after 1989 –Copyrighted automatically by virtue of copyright law Most U.S. Web pages protected by automatic copyright provision Web client computer copy of HTML file –Acceptable under fair use Includes copying it for use in criticism, comment, news reporting, teaching, scholarship, or research

47 Electronic Commerce, Tenth Edition47 FIGURE 7-7 U.S. law governing the fair-use exception

48 Copyright Issues (cont’d.) Fair use specific factors –Nonprofit educational uses have better chance of qualifying than commercial uses –Court may consider painting using different standards than sound recording –Small sections qualify when entire work might not –Court may consider amount of damage caused to value of copyrighted work Fair-use Web site sources: –University of Texas Copyright Crash Course –Stanford Copyright & Fair Use Electronic Commerce, Tenth Edition48

49 Electronic Commerce, Tenth Edition49 Copyright Issues (cont’d.) Copyright law difficult to apply –Due to elements such as fair use Vicarious copyright infringement –Entity capable of supervising infringing activity –Obtains a financial benefit from infringing activity Example: Napster –Failed to monitor its network –Profited indirectly from the infringement Music downloads, copying –Legality unclear in many cases

50 Electronic Commerce, Tenth Edition50 Patent Issues Patent –Exclusive right granted by government to an individual Make, use, sell invention –Invention must be: Genuine, novel, useful Not obvious given current technology state –1980s: companies started obtaining software patents Not useful for Web site software Technology obsolete before patent protection secured

51 Electronic Commerce, Tenth Edition51 Patent Issues (cont’d.) Business process patent –Protects specific set of procedures for conducting a particular business activity Enforcing rights under business process patent –Not yet clear –Examples: sued Barnes & Noble for process similar to 1-Click method MercExchange sued eBay over fixed price sales option

52 Electronic Commerce, Tenth Edition52 Trademark Issues Trademark –Distinctive mark, device, motto, implement company affixes to goods it produces –Identification purposes Service mark –Similar to trademark, identifies services provided Both registered with governments (state, federal) Trade name –Name business uses to identify itself –Protected under common law

53 Electronic Commerce, Tenth Edition53 Trademark Issues (cont’d.) Common Law –Law established by history of court decisions Statutory law –Elected legislative bodies pass laws (statutes) Web site designers must not use: –Any trademarked name, logo, other identifying mark Without express trademark owner permission

54 Electronic Commerce, Tenth Edition54 Domain Names and Intellectual Property Issues Cybersquatting –Registering trademarked domain name –Hope owner will pay money to acquire URL Name changing (typosquatting) –Purposely registering misspelled variations of well-known domain names Registering a generic name –Not cybersquatting U.S. Anticybersquatting Consumer Protection Act –Provides protection

55 Electronic Commerce, Tenth Edition55 Domain Names and Intellectual Property Issues (cont’d.) World Intellectual Property Organization (WIPO) –Uniform Domain Name Dispute Resolution Policy (UDRP) Handles trademark domain name disputes –Example: Barry Diller versus cybersquatters owning URL –Example: Sting musician case –WIPO criticism: UDRP enforced unevenly

56 Electronic Commerce, Tenth Edition56 © United Nations FIGURE 7-8 WIPO Domain Name Dispute Resolution information page

57 Electronic Commerce, Tenth Edition57 Domain Names and Intellectual Property Issues (cont’d.) Name stealing –Unauthorized changes to domain name ownership Domain name ownership change –Information maintained by public domain registrar changed in registrar’s database Reflects new owner’s name and business address Occurs when safeguards not in place Main purpose: harass site owner

58 Electronic Commerce, Tenth Edition58 Protecting Intellectual Property Online Digital watermark –Digital code or stream embedded undetectably in digital image or audio file Can be encrypted to protect contents –Example: Verance Provides digital audio watermarking systems –Example: Digimarc Provides watermark protection systems and software Copy control –Electronic mechanism limiting number of copies –Example: Blue Spike

59 Defamation Defamatory statement –False and injures reputation of another person or company Product disparagement –When statement injures product or service reputation Web sites must consider specific laws: –Before making negative, evaluative statements Designers must avoid potential defamation liability Electronic Commerce, Tenth Edition59

60 Electronic Commerce, Tenth Edition60 Defamation (cont’d.) Per se defamation –Statements so negative that injury assumed Important exception in U.S. law –Defamatory statements about public figures –Allows considerable leeway for: Satirical statements Valid expressions of personal opinion –Other countries do not offer same protections Web site operators with international audiences need to be careful

61 Deceptive Trade Practices Trademarked object manipulation –Constitutes infringement of trademark holder’s rights Personal Web pages –Cannot include unauthorized Web sites links –Risk implying nonexistent relationship Trademark protection prevents buyer confusion Trademark dilution –Reduction of distinctive trademark quality by alternative uses Electronic Commerce, Tenth Edition61

62 Advertising Regulation Federal Trade Commission (FTC) (United States) –Regulates advertising, publishes regulations, investigates false advertising claims FTC Web site –Includes links to advertising regulations Electronic Commerce, Tenth Edition62

63 Electronic Commerce, Tenth Edition63 FIGURE 7-9 U.S. Federal Trade Commission Bureau of Consumer Protection Business Center page Source: United States Federal Trade Commission,

64 Electronic Commerce, Tenth Edition64 Advertising Regulation (cont’d.) Illegal under U.S. law –Advertising claim misleading substantial number of consumers in a material way FTC accepts referred investigations –Better Business Bureau FTC provides policy statements –Useful for e-commerce Web site designers

65 Advertising Regulation (cont’d.) Policy statements cover specific areas –Bait advertising –Consumer lending and leasing –Endorsements and testimonials –Energy consumption statements for home appliances –Guarantees and warranties –Prices Other regulatory agencies –Food and Drug Administration (FDA); Bureau of Alcohol, Tobacco, and Firearms (BATF); Department of Transportation (DOT) Electronic Commerce, Tenth Edition65

66 Electronic Commerce, Tenth Edition66 Online Crime, Terrorism, and Warfare Internet –Opened up worldwide possibilities for people to communicate –Opened doors for businesses to: Reach new markets Create opportunities for economic growth –Tool for some for perpetrating crimes, conducting terrorism, and waging war

67 Electronic Commerce, Tenth Edition67 Online Crime: Jurisdiction Issues Online versions of physical world crimes –Theft, stalking, pornography distribution, gambling New online crime –Commandeering computer to attack other computers Law enforcement obstacles –Jurisdiction issues Tricky to determine –Prosecuting across international boundaries Internet provides new life to old fraud scams –Advance fee fraud –Nigerian scam (419 scam)

68 68 Online Crime: Jurisdiction Issues (cont’d.) Distribution of pornographic material –Jurisdiction issues –Subjective distinction between legal and illegal adult material Online gambling –Sites located outside United States –State laws specifically outlaw Internet gambling –Jurisdiction not clear –Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 provides clearer jurisdiction –Other countries’ laws challenged as discriminatory Electronic Commerce, Tenth Edition68

69 69 New Types of Crime Online Difficulty applying pre-Internet era laws –Example: online stalking –Few states have passed Internet laws Cyberbullying –Using technology to harass, humiliate, threaten, or embarrass another –Laws lag behind technology Sexting –Sending sexually explicit messages or photos using a mobile phone Electronic Commerce, Tenth Edition69

70 New Types of Crime Online (cont’d.) Infiltrating computer systems with intent of stealing data, creating operational disruptions –Smaller companies: easier targets –Criminal extortion example: Myron Tereshchuk threatened MicroPatent with confidential client information disclosure National Retail Federation partnered with eBay and FBI –Combat cases of items stolen from physical stores and then sold online Electronic Commerce, Tenth Edition70

71 New Types of Crime Online (cont’d.) Internet can help law enforcement –Track perpetrators of crime Criminals brag on social networking sites Criminals leave clues in online profiles Electronic Commerce, Tenth Edition71

72 Electronic Commerce, Tenth Edition72 Online Warfare and Terrorism New age of terrorism and warfare –Carried out or coordinated through the Internet Web sites (considerable number) –Operated by hate groups and terrorist organizations –Contain detailed instructions for creating biological weapons and other poisons –Contain discussion boards Help terrorist groups recruit new members online –Offer downloadable terrorist training films (thousands)

73 Online Warfare and Terrorism (cont’d.) Agencies devoting resources to monitoring terrorist activities online –U.S. Department of Homeland Security, Interpol –Historically: faced difficulty in coordinating activities Interpol motivations: –Update and expand computer network monitoring skills –Coordinate global antiterrorism efforts Sustained terrorist effort could slow down major transaction-processing center processing Electronic Commerce, Tenth Edition73

74 Ethical Issues Web electronic commerce sites: –Adhere to same ethical standards of other businesses Consequences all companies suffer –Damaged reputation, long-term loss of trust, and loss of business Web advertising or promotion –Include true statements; omit misleading information –Ensure products supported by verifiable information Electronic Commerce, Tenth Edition74

75 Ethics and Online Business Practices Ethical lapse rapidly passed among customers –Can seriously affect company’s reputation –Examples arrangements with publishers for book promotions eBay firearm sales 2009 Apple Apps store software approval time Important ethical issues that organizations face –Limiting use of collected addresses; related information –Lack of government regulation protecting site visitor Electronic Commerce, Tenth Edition75

76 Privacy Rights and Obligations Online privacy: evolving –Hotly debated in various forums Electronic Communications Privacy Act of 1986 –Main law governing privacy on the Internet today –Deals with leased telephone line interceptions Legislative proposals –None have survived constitutional challenges 1999 FTC report –Concluded no federal laws regarding privacy required –Created privacy advocacy group outrage Electronic Commerce, Tenth Edition76

77 Privacy Rights and Obligations (cont’d.) Direct Marketing Association (DMA) –Established set of privacy standards –Member activity regulation: less than successful Ethics issues –Significant in online privacy area Laws not keeping pace with Internet, Web growth –Nature and degree of personal information recorded Threaten visitors privacy rights Electronic Commerce, Tenth Edition77

78 Privacy Rights and Obligations (cont’d.) Ethics issues (cont’d.) –Companies may lose control of data collected –Companies may release confidential information about individuals: Without the individual’s permission –Internet has changed traditional assumptions about privacy –Worldwide cultural differences provide different electronic commerce privacy expectations European Union adopted Directive on the Protection of Personal Data Electronic Commerce, Tenth Edition78

79 Electronic Commerce, Tenth Edition79 FIGURE 7-10 Example Web page showing opt-in choices FIGURE 7-11 Example Web page showing opt-out choices

80 Electronic Commerce, Tenth Edition80 Privacy Rights and Obligations (cont’d.) Major United States privacy controversies –Opt-in versus opt-out No law limiting companies’ use of gathered information Opt-out approach –Assumes customer does not object to company’s use of information Unless customer specifically denies permission Opt-in approach –Company collecting information does not use it for any other purpose Unless customer specifically chooses to allow use

81 Electronic Commerce, Tenth Edition81 Privacy Rights and Obligations (cont’d.) Another opt-out approach –Page includes checked boxes Instructs visitor: “uncheck the boxes of the items you do not wish to receive” Opt-in approach more preferable –Gives customer privacy protection Unless customer specifically elects to give up rights

82 Privacy Rights and Obligations (cont’d.) Electronic commerce Web sites –Be conservative in customer data collection and use –Principles for handling customer data Use data collected for improved customer service Do not share customer data with others outside your company without customer’s permission Tell customers what data you are collecting and what you are doing with it Give customers the right to have you delete any data collected about them Keep data secure Electronic Commerce, Tenth Edition82

83 83 Communications with Children Additional privacy considerations arise: –When Web sites attract children Children are less capable of evaluating information sharing and transaction risks –Concerns Children’s ability to read, evaluate privacy statements Consent to providing personal information to sites –MySpace 2006: former federal prosecutor (site security officer) Software looks for sex offenders Electronic Commerce, Tenth Edition83

84 Communications with Children (cont’d.) Most countries –People under 18 or 21: not considered adults Specific laws for children’s privacy rights –Define a child as person below the age of 12 or : Children’s Online Protection Act (COPA) –Unconstitutional: restricted lawful material access Children’s Online Privacy Protection Act of 1998 –Successful: COPPA does not regulate content 2001: Children’s Internet Protection Act (CIPA) –Federally funded schools install filtering software Electronic Commerce, Tenth Edition84

85 Communications with Children (cont’d.) Disney Online –Offers three registration choices (adult, teen, kids) –Refuses to enroll child under age 13 without parent’s consent –Meets COPPA law requirements Sanrio –Requires birth date before allowing access –Encourages notification of COPPA site violations Electronic Commerce, Tenth Edition85

86 Electronic Commerce, Tenth Edition86 FIGURE 7-12 Sanrio’s approach to COPPA compliance

87 Taxation and Electronic Commerce Web businesses must comply with multiple tax laws Several types of taxes –Income taxes: levied on net income –Transaction taxes (transfer taxes): levied on products or services company sells or uses Sales taxes, use taxes, excise taxes –Property taxes: levied on personal property, real estate Greatest concern: income and sales taxes Electronic Commerce, Tenth Edition87

88 Electronic Commerce, Tenth Edition88 Nexus Connection between tax-paying entity and government –Similar concept: personal jurisdiction Activities creating nexus (United States) –Determined by state law; vary from state to state Determining nexus: –Difficult if company conducts few activities in the state National nexus issues –Business conducted in more than one country Establish nexus with a country Liable for filing tax returns in that country

89 Electronic Commerce, Tenth Edition89 U.S. Income Taxes Internal Revenue Service (IRS) –Charged with administering tax laws Basic principle –Any verifiable increase in company wealth: Subject to federal taxation Pay U.S. federal income tax if: –U.S.-based Web site generating income –Web site maintained by U.S. company Credit given for taxes paid to foreign countries –Reduces double taxation of foreign earnings

90 Electronic Commerce, Tenth Edition90 FIGURE 7-13 Internal Revenue Service home page © 2011 IRS

91 Electronic Commerce, Tenth Edition91 U.S. Income Taxes (cont’d.) States levy income tax on business earnings –Must file tax returns in all states –Apportion earnings in accordance with each state Others with power to levy income taxes –Cities, counties, other political subdivisions Must apportion income, file tax returns in each locality Companies selling through Web site –Do not establish nexus everywhere goods delivered to customers (in general) Avoid nexus by using a contract carrier

92 Electronic Commerce, Tenth Edition92 U.S. State Sales Taxes Transaction tax on goods sold to consumers Businesses establishing nexus with a state –Must file sales tax returns and remit sales tax collected from customers Business not required to collect taxes from out-of-state customers –Unless nexus established Use tax –Tax levied by a state on property used in that state Not purchased in that state

93 Electronic Commerce, Tenth Edition93 U.S. State Sales Taxes (cont’d.) Large companies –Use complex sales tax management software Purchasers exempt from sales tax –Charitable organizations, businesses buying items for resale Sales tax collection problem –Confusing; no new laws Amazon laws require online retailers to collect taxes Streamlined Sales and Use Tax Agreement (SSUTA): Simplifies state sales taxes

94 Electronic Commerce, Tenth Edition94 Import Tariffs Countries regulate import and export of goods –Goods imported: only if tariff paid Tariff (customs duty, duty) –Tax levied on products as they enter country Many reasons for imposing tariffs –Beyond scope of this book Goods ordered online: subject to tariffs –When crossing international borders Products delivered online: subject to tariffs –Example: downloaded software

95 Electronic Commerce, Tenth Edition95 European Union Value Added Taxes European Union (EU) –Transfer taxes generate revenues –Value Added Tax (VAT): most common 2003: VAT applied to sales of digital goods –EU-based companies Must collect VAT on digital good sales –Non-EU companies Must register with EU tax authorities, levy, collect, remit VAT if sales include digital goods delivered into EU

96 Summary Concept of jurisdiction on Internet: still unclear Contracts are part of doing business on the Web Web businesses must avoid: –Deceptive trade practices –False advertising claims –Defamation or product disparagement –Intellectual property rights infringement Law enforcement agencies face difficulty combating online crimes, terrorist acts, conduct of war Electronic Commerce, Tenth Edition96

97 Summary (cont’d.) Online privacy –Collection and use of consumer information –Opt-in and opt-out methods used –Special rules for communicating with children Ethics issues can shape Web business policies Various forms of taxation apply to e-commerce –National, international, state and local Electronic Commerce, Tenth Edition97

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