Do States Hamper E-Commerce?

WASHINGTON -- State regulations are preventing e-commerce from reaching its potential and is costing consumers billions of dollars, the U.S. Federal Trade Commission was told at a three-day workshop on the impact of state rules on Internet businesses.

There seemed to be little disagreement among experts on the harmful impact of state rules that, for instance, can stymie Internet-based real estate brokers from offering services at lower commissions and automakers from offering discounted vehicles.

Citing recent annual industry sales figures--$700 billion in real estate and $2 billion for automobiles--Robert Gertner, an economics and strategy professor at the University of Chicago, said if e-commerce-based transactions could reduce the typical real estate commission of 6 percent by 1 percent and lower the cost of a car by 2 percent, consumer savings would exceed $10 billion annually.

Restrictions on Internet sales "have limited the ability of e-commerce companies to provide consumers with the full potential of the Internet," said Gertner. "The justifications for these restrictions are typically weak."

No Rush to Act

The FTC, which is responsible for ensuring that competition isn't impeded, hasn't decided whether state restrictions are justified.

"The FTC is very much in a learning mode," said Commission Chairman Timothy Muris. "We do not know whether particular restrictions are or are not, on balance, pro-competitive, and pro-consumer. Nor have we decided what, if anything, should be done about any possible restrictions that may harm consumers."

But U.S. Rep. Cliff Stearns (R-Florida), who chairs the House Subcommittee on Commerce, Trade, and Consumer Protection, argued that state laws are being used to protect industries from Internet-based competition.

"There are many industries where state law and regulation are either unintentionally or intentionally impeding the growth of e-commerce," Stearns said.

The FTC is examining the impact of state regulations on a range of Internet businesses, including wine sales, cybercharter schools, contact lenses, automobiles, caskets, financial services, and retailing.

Varying Practices

State rules, as well as industry practices, that make it difficult for e-commerce firms vary widely. For instance, in some states, financial services and real estate companies must maintain offices within the state to conduct business there. Some states are considering laws that would extend their auctions rules to online sellers and franchise laws that would limit direct sales by automakers.

The FTC is weighing the arguments. Auto dealers, for instance, argue that state laws protect consumers against unscrupulous manufacturers and that Internet sales unfairly undermine their business by letting online sellers get a "free ride" off services provided by dealers. Others have argued that restrictions on sales by Internet wine sellers help keep alcohol out of the hands of minors.

But opponents of these state rules said the commerce clause of the U.S. Constitution prohibits these restrictions.

"I think we have to take seriously the notion of federal preemption," said Robert Atkinson, vice president at the Progressive Policy Institute. "Ensuring that we have robust, cross-border commerce is a role for the federal government to step into," he said.

A report released by NetChoice.org, an industry group whose members include Orbitz and EBay, argues that barriers imposed by states will cost consumers $32 billion this year.

The federal government has staved off the states from imposing Internet sales taxes, a related issue. Some critics say Internet sales hurt local retailers, and deprive states of tax revenue.