INTERNET ISSUES
The following is a condensed summary of an excellent article entitled
“The Internet and American Business in the New Millennium” appearing in
the Texas Bar Journal, Volume 63, January 2000. The article was authored
by Gregory M. Bopp, Jim Flegle, Robert E. Kinney and Eden P. Sholeen of
the law firm of Bracewell and Patterson, having offices in Houston and
Dallas.As the information flow on the Internet continues to accelerate, the
impact on the use of the Internet in business is creating issues in numerous
areas. The article addresses some of these issues, including application
of the federal Securities and Exchange Commission (SEC) regulations pertaining
to distribution of information on private offerings for securities (soliciting
monetary investments) over the Internet.
Although the law continues to evolve, the SEC does recognize that distribution
of information over the Internet does not constitute regulated “general
solicitation” or general advertising” within the meaning of SEC rule 502(c)
when access is restricted to qualified purchaser. Most interesting,
the SEC has recognized that password encryption techniques used on the
Internet can satisfy the requirements of SEC rules that otherwise would
prohibit or regulate the distribution of information as a proscribed or
regulated “general solicitation” to the public, etc. Further, distribution
of information on the Internet that is accessible to consumers in the U.S.
can be exempted from SEC regulation if the Internet message (such message
that may otherwise have constituted a regulated “offering” to the public
subject to the SEC rules) contains a prominent disclaimer making it clear
that the offer is directed to countries other than the U.S.
The second issue addressed by the article is the ability of a state
to tax a business transaction occurring on the Internet. The Internet
industry has been relying on the 1992 decision of the U.S. Supreme Court
in Quill v. North Dakota. The Supreme Court held that a state
cannot impose sales and use tax collection responsibilities on an out-of-state
vendor if the vendor does not have a physical presence within the taxing
state. (Emphasis added.) In response to the increasing volume
and value of Internet commerce, the growing concern of states of an erosion
of their tax base, and the principles outlined by the Supreme Court in
Quill, Congress passed the Internet Tax Freedom Act (ITFA). The ITFA
became effective October 1998, and imposes a moratorium on state and local
taxation of Internet access. This moratorium applies until October
21, 2001. The ITFA contains a limited exception to the three-year
moratorium for Internet access taxes, which were “generally imposed and
actually enforced” prior to October 1, 1998.
Another aspect of the ITFA is the creation of the Advisory Commission
on Electronic Commerce. This commission consists of representatives
of the federal government, state and local government, electronic commerce
industry, telecommunications carriers, local retail businesses and consumer
groups. The commission is to conduct a thorough study of the taxation
and commerce issues related to the Internet. A report is to be issued
in April 2000.
The third issue discussed in the Article is whether a vendor or consumer
utilizing the Internet becomes subject to the jurisdiction of the state
in which the other party to the transaction resides. The issues is
to determining the physical location of contacts that occur through the
Internet. The Fifth Circuit Court of Appeals recently addressed the
issue in Mink v. AAAA Development LLC. The court affirmed the dismissal
of a Texas resident’s complaint against defendants located in Vermont.
The Texas resident asserted that the Texas courts had jurisdiction since
the defendant’s web site was accessible to Texas residents. The Fifth
Circuit, in affirming the dismissal of the complaint against the Vermont
defendants, also affirmed the use of a “three area spectrum” analysis.
In this analysis, a web site may support the assertion of jurisdiction
when combined with additional facts demonstrating the defendant vendor
does business over the Internet by entering into contracts with residents
of other states which ‘involve knowing and repeated transmission of computer
files over the Internet.
At the other end of the spectrum, if the defendant vendor merely establishes
a passive Website that does nothing more than advertise on the Internet,
the defendant is not subject to the jurisdiction of the state courts where
the plaintiff resides when no other conduct within the state is shown.
A distinction appears to be if the vendor accepts orders through its Website,
in contrast to using it only as a means to advertise its goods or services,
and to inform potential customers how it may contact the vendor to place
orders, including orders via fax or email.
Finally, the increased use of the Internet raises numerous issues for
employers, including employers that allow employees to “telecommute” via
the Internet from other states and the application of application of the
Americans with Disabilities Act (ADA) to vendors doing business thorough
the Internet. In regard to the ADA, the U.S. Department of Justice
has already taken the position that the ADA applies to cyberspace.
The ADA applies by statute to businesses that are deemed to be “public
accommodations.” This has been deemed to be most business activities
directed to or accessible by the public. At issue is whether the
establishment of a Website by a business would constitute an activity of
public accommodation, subjecting the business and its Website to the requirements
of the ADA. At this time, there are no proposed rules for this topic;
it is very likely that this issue will also soon become a topic of government
scrutiny. Reference is made to www.w3.org/1999/05/WCAG-REC-fact.
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