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Legislative Efforts to Regulate Online Transactions

Last year, the California State Legislature made various efforts to regulate commercial transactions on the Internet. These efforts provide interesting questions and concerns regarding practical and constitutional limits on a state’s capability to legislate or regulate transactions on the world-wide-web (i.e., the Internet) due to its intrinsic interstate character.

One important consideration is the Dormant Commerce Clause, which stems from Article I, section 8, clause 3 of the federal Constitution. This doctrine implies that Congress only has the power to regulate interstate commerce and that the states do not have such power. Its application to the regulation of activities on the Internet is not quite developed and includes a series of judicially-created analyses. So far, the United States Supreme Court (which is the nation’s highest court) has not issued any definitive rulings. In addition, we do not have authoritative decisions by federal courts regarding the capability of the states to control online privacy and data security, tax online sales, or regulate online gambling.

As mentioned in this article, the legislators in this state passed or proposed laws that would develop our state’s regulatory power over transactions on the Internet which relate to the following topics: (i) privacy and data security; (ii) taxation of retail sales over the Internet; and (ii) online gambling.

California’s legislation (i.e., enactment of laws) may be different from federal legislation efforts which could cause the United States Supreme Court to repeal or strike down the law. SB 761, which is “Do Not Track” bill, posits that legislation would violate the Dormant Commerce Clause since it would cause regulation of an out-of-state activity and would subject online businesses to inconsistent state regulation. As such, a state’s efforts to tax online retail activity are limited by current federal laws (e.g., court decisions and/or statutes) preventing the states from taxing sales of businesses which do not have a geographic presence in the specific state. A state’s power to control or regulate online gambling is still uncertain, especially because of the absence of clear federal law on the subject. Thus far, one state supreme court has upheld a state’s right to ban online gambling over a Dormant Commerce Clause challenge.

The future of state regulation of Internet activity depends on various developments. For example, it depends on the standard of scrutiny which courts apply to state regulation of the Internet. Second, it depends on the arrival of new technology which can help website operators to distinguish users from different states. Third, it depends on the viewpoint of Congress towards online transactions and whether it is willing to subject activities exclusively to federal regulation or to grant states the power to regulate these type of activities.

The following is a list of new and pending legislation in California:

I. Privacy and Data Security

1. S.B. 24 (Data Security Breach Notice)
2. S.B. 445 (Library Records
3. S.B. 602 (Reader Privacy )
4. S.B. 761
a. Do Not Track
b. Un-passed
II. Taxation — A.B. 28 (“Amazon” tax)

III. Gambling

1. S.J.R. 14 (opt out of federal regulation)
2. S.B. 40 & 45
a. State framework
b. Did not pass