World Telecommunication Day 1998

May 4, 1998

Internet Commerce: Wild and Free or Orderly and Safe?

Should - or can - electronic commerce be regulated and taxed? Governments and business groups are grappling with the question.

One of the most troubling things about Internet commerce is that you don't see the people with whom you are doing business. Business is based on trust, and commercial trust is based on a regulatory framework. If you don't trust suppliers, you won't order from them, and if you don't trust shopkeepers, you won't buy from them.

''The closer one is to purchase, the more human interaction is needed,'' says Schoeman Rudman, director of network computing for IBM's global insurance industry unit. He calls it the ''fingers around someone's neck'' impulse.

Cyber-necks are elusive on the electronic frontier, but questions about them abound. Should electronic commerce across borders be regulated and taxed? How can consumers and businesses be protected from fraud?

What about intellectual property rights, competition policy, data protection and privacy, encryption and illegal or controversial content, such as pornography?

National governments, international organizations, and private industry groups and associations are all attempting to find answers, develop frameworks for discussion or - at the very least - agree on a process for defining the questions.

John Dryden, head of the information, computer and communications policy division of the Organization for Economic Cooperation and Development (OECD), explains that the fundamental problem with government intervention is that governments are geographically delimited while the Internet is trans-border and distance-independent.

Governments have other shortcomings. They have to deal with each other to make international regulations stick, but differ among themselves as to who controls what. In the United States, the independent Federal Communications Commission oversees services; in Europe, it is usually a government ministry.

The U.S. government and the European Union have brought together top-level business leaders in a group called the Trans Atlantic Business Dialogue. The Electronic Commerce committee of TABD is trying to convince governments in Europe and North America to take a laissez-faire approach to the Internet. They argue that the free market and consumer choice will give rise to the necessary Internet standards and safeguards.

Bill Poulos, director of electronic commerce policy for EDS, a computer-services firm, chairs this committee. He believes that business should play a more active role in Internet policy development than it has done heretofore. ''In the past, highways were built with public money,'' he says. ''Future [virtual] highways will be built with private money.''

He emphasizes that governments have an obligation to protect the interests of all stakeholders, including but not only business. The point is to open a dialogue, to ''make a place for business at the table'' with proposals that are industry-led, market-driven, self-regulating, transparent and that offer incentives for private investors. ''If the situation is not transparent, private investors won't put their money in it,'' he notes.

A similar viewpoint is expressed by John Curran, chief technology officer, GTE Internetworking, who serves on a number of advisory committees for Internet policy development. He says it is not the outcome per se that is important today, but the need to evaluate the costs of competing alternatives.

Less certain than death

The problem for tax administrations - as for other areas of Internet commerce - is that legal frameworks function within defined boundaries, and the Internet has none.

''Some businesspeople would rather have an 8 percent e-commerce tax everywhere than 8 percent here and 6 percent there, with no transparency or consistency,'' Mr. Curran claims.

Taxation is subject to competing claims and authorities. With store sales, the tax is based on the point of sale. With mail order, the tax is based on the residence of the buyer. Which category is appropriate for goods purchased over the Internet?

Brian Catt of Infonet Services Corp., which offers communications services to multinational companies, says that collecting taxes often can work ''in the same ways as commerce by post or telephone; it is the responsibility of the buyer and seller to notify their applicable authorities of transactions through their accounts and other returns as required by the law. It is not the job of the transport service for the transaction to provide the mechanism for this.''

Taxing sales of digital goods like software and music is complicated, because bit-based goods can come from several locations and be sent to several others.

One proposal currently under discussion in the United States is a federally administered tax allocated back to relevant parties (states or local entities) on a basis as yet to be determined, says Mr. Curran.

Another suggestion is a tax on the Internet ''pipes'' running through a state, just as there are state highway-use taxes.

The International Chamber of Commerce supports the call by President Bill Clinton of the United States for a moratorium on e-commerce taxation until December 31, 2000.

The secretary-general of the ICC, Maria Livanos Cattaui, warns that ''fragmented regulation by national governments could severely hamper the development of a marketplace in cyberspace.''

What is Internet content?

Content regulation is even more difficult because technology and the market itself have blurred distinctions among the providers of communications channels, Internet services and content. Then there are new categories like Internet telephony. Should it be regulated by phone regulators or some other body or no one at all? Should WebCasting be considered a television station or not? ''The jury is still out on this,'' says Mr. Dryden of the OECD. ''You have to ask, 'Can you stop people from doing this? Should you stop them?'''

The lag between market realities and legislative frameworks was dramatized last month when the U.S. ban on export of encryption software was undermined by the American developer of PGP (Pretty Good Privacy), which has found an ostensibly legal way around the ban by selling a parallel product through a Swiss company.

Premature regulation means that a country will become an island on the Internet, and that others will route around it, observes Mr. Poulos of EDS.

Claudia Flisi