April 30, 2006

To date, legislators have focussed their e-commerce efforts on rapidly making the least change to the regulatory framework that will facilitate the growth of business online – enabling electronic agreements, moratoria on internet taxation, and so on. But growing demand amongst consumers and policy-makers suggest that this approach has begun to invert, and the number of positive requirements to adopt the key benefits of successful online business models – like speed, audit-trails and transparency – are increasing. This has obvious implications for the legal advice that offline businesses are receiving.


Witness the fascinating battle that is raging across the pond, as eBay wades in yet again to defend its commercial partners – drop-off stores and “top” sellers – against the extension of pawnbroker and/or auctioneer licensing regimes, at the urging of the second-hand goods lobby.[1] States that are considering legislation include California, Florida, Texas and New York.[2]


You would have thought that this might sound the death-knell for the support of e-commerce, but all the attention is exposing holes in the offline model for selling second-hand goods that incumbents are struggling to plug. So, how long will it be before regulators begin “counter regulating” the offline world, or insisting that offline businesses[3] incorporate the benefits of their online competitors?


In the face of similar attack by offline bookmakers in this country, Betfair’s systems have come to be relied upon by authorities to help stamp out gambling activity that would have gone undetected in the offline gambling process.[4] UK clearing banks have also been forced to spend the two years of IT investment they say are needed to reduce the clearing time for electronic payments.[5]


But both the scope and intensity of the battle between the eBay community and the pawnbrokers, and the relative ethical profiles of the protagonists, suggest that more far-reaching counter-regulation may not be far away.


The pawnbrokers are not short of mainstream representation. And, ironically, given their tradition for liberal values, among the assailants against the eBay community are San Francisco-based Democrats, who have tried and failed to bring the eBay community to heel on these issues twice – in 2004 and 2005. If that wasn’t ironic enough, one unsuccessful legislator actually emphasised it, saying, “The votes just aren’t there. With eBay you’re up not against a giant but the Green Giant.” [6]


Now, why on earth are liberals attacking the Green Giant and the small businesses gathered around it[7]? For how long can they back entrenched pawnbrokers[8] and other second-hand sellers, whose questionable activities in the past spawned the licensing regimes?


Consider the practicalities of the two sales processes:


·         To pawn or sell second-hand stuff in, say, California, you go into a licensed pawn shop, identify yourself, give a thumb print and walk out with the cash, never to be seen again;


·         To sell stuff on eBay, you identify yourself, photograph the stuff and display it to the entire world, wait for payment until after somebody buys the stuff (leaving an audit trail in the process) – in the drop-off situation, you can only get paid by check (sic), posted to your verified home address. Add to that the system for publicly rating the quality of the experience.


Even if the two methods of deriving money from second-hand goods were both created yesterday, it’s easy to see that the chances of stolen goods passing through pawn shops are much higher than their being fenced via eBay. Hence, the eBay community is resisting the new regulation because it would needlessly involve “top” sellers and drop-off stores (i) becoming licensed (ii) fingerprinting sellers and – here’s the killer – (iii) paying a licence fee that is intended to pay for a new system of reporting transactions to the police via a new electronic database.


Why can’t the police simply log onto eBay, or force pawnbrokers to photograph and display on a shared web site all the goods they accept as loan collateral – or at least those that are not redeemed and are subsequently offered for sale?


Reading between the lines, what may be motivating the liberal legislators is that:


·         entrenched second-hand goods sellers, who have traditionally served low income earners to date, are losing more and more of their business to the eBay community


·         in addition to losing business, existing licenceholders face the implementation of a new police database designed to make it easier for the police to track stolen goods, and they fear losing more business if drop-off stores are perceived to be a less visible route (which of course they aren’t)


·         many US states, like their European counterparts, claim to be losing tax revenues on online sales[9] and eBay’s “top” sellers are among the chief culprits so getting them to submit to local jurisdiction is a Holy Grail.


The pawnbrokers’ position also ignores the facts that:


·         any fraudster/thief would be reluctant to use eBay in preference for a pawnbroker or second-hand dealer, where he can get cash-in-hand for goods quickly


·         drop-off stores help those without Internet access reach a wider marketplace and therefore get a better chance of maximising the price for their goods


·         the changes to the law are only resolving issues for the police, and not the consumer.


These issues either expose problems in the offline second-hand goods market or relate to the e-commerce taxation debate. But the two are linked.


Some argue that “foregone” sales tax and the Internet taxes moratorium is a subsidy, or positive discrimination in favour of e-commerce, and that this should end when either e-commerce is firmly on its feet or when the moratorium is unduly harming either offline businesses, or taxpayers. There are big holes in this argument[10] but, even if it is right, neither condition is yet satisfied, as Congress has found by extending the tax moratorium until November 2007. And anyone relying on handouts to survive the movement of business online had better start investing the money to go online themselves.


Consider what will happen when e-commerce is as entrenched as offline business still is today. Successful online businesses will have demonstrated to most consumers the inadequacies in the business models of their offline counterparts, and consumers who encounter these offline businesses will realise they are at a disadvantage compared to those consumers dealing online.  So, where will the votes be then? In introducing legislation that actually requires entrenched offline businesses to implement the key benefits of online business models, that’s where. Policy-makers will begin playing to consumers by demanding, on threat of legislation, that entrenched industries be obliged to adapt their business models to take advantage of technological advances. And they won’t expect the online majority to pay directly for the technological advancement of offline businesses through licence fees or otherwise, any more than those offline businesses are obliged to directly invest in e-commerce start-ups today.


Whether offline businesses will cope with counter-regulation, remains to be seen. Needless to say, they’ll need plenty of help from those experienced in the legal challenges of doing business online if they are to survive.


Simon Deane-Johns is a founder and the General Counsel of Zopa, the world’s first person-to-person lending and borrowing exchange; and a consultant lawyer with Lawyers Direct. Email:



[3] NB A non-transactional “brochureware” web site doesn’t put an offline business online.




[7] Nationally, 7’000 drop-off locations (; 724,000 people whose full-time job is buying and selling on eBay (

[8] In California, 700; versus 4,000 Californians who help others sell on eBay and 10million Californian eBay users, 37,000 of whom are “top” sellers

[9] The obligation to pay sales tax in the US is a state matter, determined by the location of the buyer, not the seller. The US Supreme Court held that if a business does not have a physical presence or “nexus” in a particular state, such as a store or warehouse, it is not required to collect sales tax for sales from customers in that state: Quill v North Dakota, 504 U.S. 298 (1992). Individuals and big sophisticated retailers alike are using the Internet to take advantage of this, leaving smaller retailers stuck with sales tax. Compounding this is the federal moratorium on US state taxation of Internet access and on multiple or discriminatory taxes on e-commerce until 1 November 2007 – see the Internet Tax Nondiscrimination Act, Public Law No: 108-435 (signed 3 December 2004).

[10] (1) States could collect “use” tax from their locally resident buyers if only they could design an efficient way of doing so. (2) States receive federal government handouts by way of compensation, albeit these come with ties on how they’re spent. (3) State sales taxes are enormously complex and difficult to administer and, according to eBay, the “Streamlined Sales Tax Project does little to reduce the 7,600 different state, county and city taxing jurisdictions. In fact, [it] allows for a different rate for each zip code… as many as 49,000 different jurisdictions”. (4) Far from being a financial drain, e-commerce has created enormous wealth and otherwise benefited the US economy, as well as the economies of certain key states. The real issue is how this wealth is distributed amongst individuals, corporations and government – something unlikely to be resolved by licensing the underlying business activities.