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Chapter 13

Public

Policy

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 13. Public PolicyChapter 13. Public Policy

Questions Answered in this Chapter:

– How is the Internet currently regulated?

– What are the challenges the Internet has brought to regulation?

– What are the main regulation issues on the Internet today?

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IntroductionIntroduction Overview

– Countries must decide how to regulate, how much to regulate, and who should regulate the Internet within their boundaries and with other countries

– Governments are trying to regulate the Internet without hurting their economies, but also without infringing on the rights of citizens and existing business

– So far, few laws intended to regulate the Internet have been passed

Regulation challenges posed by the internet:– Access (physical layer)– Taxation (business-logic layer)– Privacy/security (business-logic layer)– Copyright (content layer)– Free Speech (content layer)

13-5Exhibit 13-1: Elements of Exhibit 13-1: Elements of Internet RegulationInternet Regulation

Physical level

Access regulations

Business logic or code level

Taxation

Privacy & security

Content level

Copyright

Free speech

Government agency actions

Court cases

Laws

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The Digital DivideThe Digital Divide

• The gap between the people who are on the Internet and the people who are not on the Internet.

• The digital divide is closing across educational levels and race, but it remains significant among low income households and individuals over the age of 65.

• The significance of the digital divide will become more prevalent as the Internet becomes a more prominent component of society.

13-7Exhibit 13-2: Access—Notable Exhibit 13-2: Access—Notable Regulatory EventsRegulatory Events

•Communications Act (1934)

•Carterfone Decision (1968)

•FCC First Computer Inquiry (1971)

•Breakup of AT&T (1981-84)

•European Memo of Understanding on Unified Wireless Standard (1987)

•Telecommunications Act (1996)

•AT&T v. Portland (1998)

13-8Exhibit 13-3: Effect of Sales Exhibit 13-3: Effect of Sales Tax on Online PurchasingTax on Online Purchasing

Source: UCLA Internet Report 2001: Surveying the Digital Future

18.1%

25.2%

12.3%

8.4%

36.1%

13.1%

5.4%

46.9%

12.3%

22.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

StronglyDisagree

Disagree Neither Agreenor Disagree

Agree Strongly Agree

Did Shop Online

Never Shopped Online

Per

cen

t o

f R

esp

on

de

nts

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TaxationTaxation

Overview– The existing tax system for offline stores is extremely

complex– e-commerce companies benefit from current tax laws in two

ways:• They attract customers who do not want to pay taxes• They do not have to pay the high costs associated with

collecting sales tax

Current Status– The Internet Tax Freedom Act (enacted in 1998) restricts

changes to current laws and limits new taxes from being imposed on e-commerce purchases

– Offline stores have begun to protest that their online competitors do not have to charge sales tax as they do

– Governments are generally against extending the tax moratorium because of the lost tax revenue

13-10Exhibit 13-4: Effect of Sales Exhibit 13-4: Effect of Sales Tax on ConsumersTax on Consumers

Source: Jupiter Communications, as cited in The Industry Standard, “Execs Say No Net Taxes”, July 3, 2001.

0%

10%

20%

30%

40%

50%

60%

Always Usually Sometimes Rarely Never For OrdersOver $50

For OrdersOver $100

Percent of Consumers Who Are Affected by Sales Tax

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Taxation (Cont’d)Taxation (Cont’d)

Proposed Legislation

– The House Committee studying the problem recommended that the Internet Tax Freedom Act be extended until 2005

– Whether or not that occurs remains to be seen

Impact

– Preliminary evidence suggests that the Internet sales tax would have minimal impact on consumption

– The biggest impact would be felt by those States who stand to loose considerable amounts of money if sales tax law is not passed

13-12Exhibit 13 -5: Sales Tax Losses – Exhibit 13 -5: Sales Tax Losses – Top Ten StatesTop Ten States

All Remote Sales Internet Sales All Remote Sales Internet Sales

California $298 - $1,446 $23 - $533 $686 - $3,650 $86 - $1,720

New York $196 - $889 $22 - $357 $521 - $2,339 $81 - $1,155

Texas $252 - $992 $26 - $342 $655 - $2,446 $96 - $1,125

Illinois $117 - $545 $13 - $212 $298 - $1,389 $44 - $671

Florida $120 - $503 $13 - $179 $321 - $1,279 $48 - $595

P ennsylvania $102 - $381 $12 - $156 $281 - $1,012 $45 - $505

Ohio $108 - $357 $11 - $141 $286 - $955 $43 - $454

New J ersey $101 - $346 $10 - $130 $256 - $879 $37 - $419

Michigan $109 - $346 $10 - $125 $276 - $882 $39 - $415

Washington $82 - $284 $8 - $98 $213 - $712 $30 - $326

Total for all U.S. States $6,100 - $9,100 $2,500 - $3,800 $13,600 - $20,400 $7,800 - $12,400

2000 2003Remote and Internet Sales Tax Losses Forecast for State and Local Governments

California, New York and Texas Each May Loose $1 Billion in E-Commerce Sales Tax in 2003

13-13Exhibit 13-6: Taxation & CommerceExhibit 13-6: Taxation & Commerce—Notable Regulatory Events—Notable Regulatory Events

•Internet Tax Freedom Act (1998)

•Uniform Electronic Transactions Act, UETA (1999)

•2000/31/EC, EC Directive on Electronic Commerce (2000)

•Electronic Signatures in Global and National Commerce Act, e-Sign (2000)

•Uniform Computer Information Transactions Act, UCITA (2000)

•EU Internet V.A.T. Directive (2002)

13-14PrivacyPrivacy

Overview– The Code of Fair Information Practices, drafted by the Nixon

administration, was never enacted– The government originally expected the industry to regulate

itself, but dot-coms are using their customer databases as tradable assets

Current Status– So far, only the Children’s Online Privacy Protection Act

(COPPA) has been passed– States have the latitude to enact tough financial privacy laws– The public is overwhelmingly concerned about privacy on the

internet– Privacy advocates are unsatisfied with the government’s lack

of involvement, while Internet executives worry that strict privacy regulations could mean the end of the Internet

13-15Privacy Privacy (Cont’d)(Cont’d)

Proposed Legislation– Over 100 bills regarding privacy on the Internet are currently

in Congress

– Proposed legislation ranges from requiring websites to have a ‘clear’ privacy policy to requiring websites to obtain permission from visitors (opt-in) before collecting any personal data

Impact– While many Internet companies fear government regulation,

they might actually suffer more if the government does not get involved

– Government privacy regulation will have an impact on how Internet companies generate revenue

13-16Exhibit 13-7 : Private Activities Exhibit 13-7 : Private Activities Americans Do OnlineAmericans Do Online

Source: The America Online / Roper Starch Worldwide Adult 2000 Cyberstudy

16%

19%

25%

56%

70%

14%

17%

42%

0% 25% 50% 75% 100%

Trading Stocks

Keeping PersonalAppointment Calendar

Banking

Making Purchases

Getting Health Information1999

2000N/A

N/A

13-17Exhibit 13-8: Privacy and SecurityExhibit 13-8: Privacy and Security—Notable Regulatory Events—Notable Regulatory Events

•European Parliament Directive 95/46/EC on personal data (1995)

•Child Online Privacy Protection Act, COPPA (1998)

•UK Data Protection Act (2002)

•USA Patriot Act (2001)

•Children’s Internet Protection Act, CIPA (2001)

•Gramm-Leach-Bliley Act (2000)

•Implementation of US Safe Harbor Provisions (2000)

13-18CopyrightCopyright

Overview– Copyright law has been the biggest and most immediate

challenge for Internet businesses and consumers– Copyright is intended to strike a balance between protecting

a creator’s work and letting the public use it. It is NOT intended to give ownership to the creator

Current Status– Three main aspects of copyright laws affect the Internet:

• The Copyright Act of 1976 - Gives owner of the copyright the ability to replicate & distribute the work

• The Fair Use Doctrine - Gives the public the right to fair use of the work

• The Digital Millennium Copyright Act– Prohibits the circumvention of copyright protection system– Protects ISPs from being liable if subscribers infringe copyright

laws

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CopyrightCopyright (Cont’d) (Cont’d)

Proposed Legislation

– Since courts have generally sided with copyright holders, much of the proposed legislation is intended to protect the Internet users

Impact

– The impact of copyright law on the Internet has yet to be fully felt

– Studies suggest that record companies would be hurt, rather than helped, by file-swapping sites

13-20Exhibit 13-9: Copyright—Exhibit 13-9: Copyright—Notable Regulatory EventsNotable Regulatory Events

•World Intellectual Property Organization Treaty presented to UN (1996) (35 countries, including U.S., ratified treaty as of March 2002)

•Digital Millennium Copyright Act, DMCA (1998)

•Universal City Studios, Inc., et. al. v. Corley (2001)

•Court-ordered shutdown of Napster (2002)

13-21Free SpeechFree Speech Overview

– Free speech is one of the most protected rights is the U.S.– Individuals must face the consequences of how their opinions

are received by others– The lack of borders makes it difficult to determine whose free

speech rules to use

Current Status– Courts use the offline free speech test for Internet free speech

issues:• Is the speech a direct, credible threat against a specific target, or

a direct incitement to imminent illegal action?

– People must first sue the ISP for the identities of offenders before they can sue the offenders themselves

– Web filters to restrict access to inappropriate sites are being criticized by freedom of speech activists

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Free SpeechFree Speech (Cont’d) (Cont’d)

Proposed Legislation– Courts will determine not only who can sue whom for

slanderous remarks, but also when ISPs have to disclose the names of their users

Impact– Freedom of speech legislation will have a chilling effect on

people who feel that they can be taken to court for what they say on the Internet

– On the other hand, if people are not held responsible for what they say, it will have a detrimental effect on the perceived veracity of the Internet content

– In contrast to Newspaper journalists, Internet journalists often publish stories without getting confirmation on the accuracy of the story

13-23Exhibit 13-10: Free Speech—Exhibit 13-10: Free Speech—Notable Regulatory EventsNotable Regulatory Events

•Reno v. ACLU, CDA Case (1997)

•Yahoo, Inc., v. La Ligue Contre le Racisme, et. al. (2001)

•Ashcroft v. Free Speech Coalition (2002)

•Ascroft v. ACLU (2002)