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.