New York State Tax Department Issues Memorandum Clarifying Internet Sales Tax Requirements

TSB—M-08(3.1)S

Recently Enacted Law

As discussed in previous newsletters, the New York State Tax law was amended recently to provide a presumption that certain out-of-State sellers of taxable goods or services are considered to be “sales tax vendors” and are required to collect state and local sales taxes.
Under the new law, an out-of-State seller is presumed to be a “vendor” if the seller enters into agreements with residents of New York to refer customers to the seller.

Vendors May Rebut the New Presumption

The New York State Department of Taxation and Finance (Office of Tax Policy Analysis - Taxpayer Guidance Division) recently issued a memorandum ("Memo") intended to provide guidance concerning how an out-of-State seller advertising on the Internet can rebut the presumption that it is a vendor required to register with the State of New York for sales tax purposes.

How to Rebut the Presumption

Need : Language in Contracts and Certificate of Compliance

According to the Memo, it is insufficient to merely include language in a contract between an out-of-State seller and a resident affiliate that prohibits the affiliate from engaging in any solicitation activities other than posting the seller’s link on its website.
In addition to including such language in its contracts, the seller must also require its New York resident affiliates to submit to seller, on an annual basis, a signed certification (a “Certificate of Compliance”) that it has not engaged in any other prohibited solicitation activities (distributing flyers, coupons, newsletters and other printed promotional material, or electronic equivalents; verbal solicitation; initiating telephone calls; and sending e-mails) during the past year.

Certificate of Compliance Requirements

The Certificate of Compliance may be submitted to sellers in paper form or electronically.
If the resident affiliate is an organization, the certification must also include a statement certifying that its website includes information directed at its members - alerting them to the prohibition against the solicitation activities mentioned above.
It must contain a statement alerting the resident affiliate that the certification and any information submitted with it is subject to verification by the Tax Department.
It also must include the affiliate’s name and address.
The seller must maintain copies of all of its Certificates of Compliance and must make copies available upon request.
There is currently no standard form available for the Certificate of Compliance, but the Tax Department intends to create a form in the future.

Summary

The burden to rebut the sales tax vendor presumption remains with the seller.
Out-of-State vendors using affiliates in New York should consider the guidelines issued by the Tax Department when seeking to rebut the presumption that they are sellers for New York State tax purposes.

Virginia Supreme Court Overturns State Anti-Spam Law and Associated Conviction Under Statute

Jeremy Jaynes v. Virginia,
Record No. 062388 (Sept. 12, 2008)

Facts

On three (3) separate occasions, Jeremy Jaynes used computers, Internet routers and servers, each time sending over 10,000 unsolicited commercial e-mail messages to subscribers of America Online, Inc. (“AOL”).
Jaynes falsified the e-mail header and routing information before sending the subject e-mails to recipients.
At Jaynes’ home, police found compact discs containing over 176 million full e-mail addresses and 1.3 billion e-mail user names.
In 2003, Jeremy Jaynes was the first person indicted under the newly- enacted Virginia State anti-spam law.
Jaynes was convicted in 2004 for sending tens of thousands of unsolicited e-mail through AOL servers in Virginia, and was later sentenced to nine (9) years in prison.
Just six (6) months ago, the Virginia Supreme Court upheld the anti-spam law by a 4-3 margin. Jaynes’ attorneys moved the court to reconsider.
The court reversed itself.

The Law

The Virginia Statute is considered to be, in most respects, the state equivalent of the federal CAN-SPAM Act, but differs in that it affords only criminal penalties for its violation.
The law provides in pertinent part:

A. Any person who: 1. Uses a computer or computer network with the intent to falsify or forge electronic mail transmission information or other routing information in any manner in connection with the transmission of unsolicited bulk electronic mail through or into the computer network of an electronic mail service provider or its subscribers . . . is guilty of a Class 1 misdemeanor.

Virginia Supreme Court

The court struck down the law, holding that it is “unconstitutionally overbroad on its face because it prohibits the anonymous transmission of all unsolicited bulk e-mails including those containing political, religious or other speech protected by the First Amendment . . . .”
Viewed under the “strict scrutiny” standard, the court found that the statute is not narrowly tailored to protect the compelling interests advanced by the State Constitution.

Summary

The Virginia statute is overly broad and, as such, violated the First Amendment.
Specifically, the law applied to the “falsification” of e-mail header information, which serves to include those who send unsolicited e-mail, as well as those using a “fake” name or pseudonym.
In addition, the law regulates both commercial and non-commercial e-mail – which could, by definition, cover and apply to legitimate e-mail messages in violation of the First Amendment.

7Search.com Sues McAfee for Unfair Business Practices Under the Lanham Act and Other State Statutes

7Search.com, Inc., v. McAfee, Inc.,
Civil Action No. 08CV4831 August 25, 2008

According to the Complaint:

7Search.com is a pay-per-click search engine advertising and affiliate network.
McAfee, Inc. ("McAfee"), offers through its website www.siteadviser.com, software characterized as a “web safety tool” – also known as its “SiteAdvisor” program.
Through its website and software, McAfee names and classifies what it considers to be Internet security threats: adware, spyware, viruses, worms, unauthorized intrusions, etc.
McAfee’s “Terms of Service” state that it “tests websites, downloadable programs, and registration/signup forms using a variety of automated and manual techniques.” It also claims that its test results include feedback from users, comments from website owners, and analysis from its employees.
The SiteAdvisor software summarizes the website safety results by using red (considered an unsafe site), yellow (considered a potential risk) and green (considered safe to use) ratings.
Beginning in 2007, McAfee has rated third-party websites using this color-coded system.
By way of example, a website that has a red SiteAdvisor rating will receive a red “X” warning in search results when the SiteAdvisor Search toolbar is used by an Internet user.

McAfee’s Red Rating

Since 2007, McAfee SiteAdvisor has rated the site 7Search.com with a red rating – suggesting that it is a detected Internet security threat.
However, since 2003, there have been no direct downloads available on the 7Search.com site.
McAfee claims that the basis for the red rating is either due to reviews of third-parties unaffiliated with McAfee, or criteria used by McAfee SiteAdvisor that is undisclosed to the public.
7Search.com gave written notice to McAfee detailing its objections to the red rating.
McAfee failed to change the rating.

The Action

Because of the persistent red SiteAdvisor rating, 7Search.com brought an action against McAfee for unfair business practices under the Lanham Act, the Illinois State Uniform Deceptive Trade Practices Act and common law business defamation, trade disparagement and unfair competition

Summary

We will stay tuned to any new developments in this important case.
This is not the first time McAfee’s rating system has negatively affected a website owner.
McAfee’s policy is to not retest sites until they come up for review under McAfee’s periodic testing cycle.
However, it is our experience that if McAfee is provided with compelling evidence that demonstrates that a rating that has been assigned to a particular site is unwarranted, it will retest the site out of cycle upon request and assign the appropriate rating.

Enzyte Executive Convicted of Fraud Gets 25-Year Sentence

Enzyte Manufacturer Receives Sentence for Fraudulent Advertising
Ordered to Pay $93,000 in Fines

What/Who is Enzyte?

Enzyte is advertised as “the once-daily tablet for natural male enhancement.”
Steve Warshak ("Warshak") is the founder of Berkeley Premium Nutraceuticals ("Berkeley"), the distributor of Enzyte.
In addition to Enzyte, Berkeley distributes other products that claim to boost energy, manage weight, reduce memory loss and aid sleep.
Warshak was convicted in February, 2008 on 93 counts of mail fraud, bank fraud, conspiracy and money laundering.

What Happened?

The Food and Drug Administration (“FDA”) had been investigating Berkeley for several years.
Regulators across the country had received thousands of complaints about the Company’s business practices – most notably that Berkeley required its customers to affirmatively opt out from receiving regular shipments of its products.
Warshak instructed his employees to make it difficult for customers to receive refunds. Berkeley’s former COO testified that in order to obtain a refund for an Enzyte purchase, Warshak required customers to provide notarized documents from a doctor that they still had small genitals following use of the product.

Accusations

Federal prosecutors accused Berkeley of bilking customers out of more than $400 million with deceptive ads, manipulated credit card transactions and refusal to accept returns or cancel orders.
United States District Court Judge Arthur Spiegel found that, “This is a case about greed.” He pointed out that “Steven Warshak preyed on perceived sexual inadequacies of customers.”

Summary

Judge Spiegel found Warshak’s business tactics particularly distasteful, which may have accounted for the severity of the sentence.
Marketers and distributors of products should carefully review the validity of all advertising claims in their campaigns prior to launch. Liberal cancellation policies and professional customer service are crucial aspects of any business.

Commerce Department Develops Certification Mark -- Signifies Compliance With Data Protection Standards

Safe Harbor Framework July 31, 2008

What is the Safe Harbor Framework?

The United States ("U.S.") – European Union (“E.U.”) Safe Harbor Framework facilitates secure, uninterrupted transfers of personal information that support billions of dollars in trade from the E.U. to the U.S.

How Does it Work?

Companies that certify compliance with the provisions of the Safe Harbor Framework may display this certification mark on their website in order to identify their commitment to ensuring that E.U. citizens’ data is secure.

How Does a U.S. Company Get Certified?

U.S. companies that wish to participate must follow specific instructions developed by the United States Commerce Department, Office of International Trade Administration (“ITA”).
According to the ITA, only those companies that have self-certified and are listed on ITA’s official Safe Harbor Program list, will be permitted to use the mark.
Companies will be required to maintain their status on the list by requesting an annual renewal from the ITA.

Global Recognition of the List

The ITA reports that more than 1,500 U.S. companies presently participate in the Safe Harbor Program.
Further, according to the ITA's website, “it has achieved global recognition as one of the best ways to meet the requirements of the E.U.’s Data Protection Directive.”

Copyright Owner Required to Consider Fair Use Doctrine for Claim Under Digital Millennium Copyright Act

Lenz v. Universal Music Corp., ___F.Supp.2d___,
2008 WL 3884333 (N.D. Cal. Aug. 20, 2008)

Facts

Plaintiff, Stephanie Lenz, videotaped her children dancing at home to the famous Prince song, “Let’s Go Crazy.”
Lenz titled the video “Let’s Go Crazy # 1” and uploaded it to YouTube.com ("YouTube") for the alleged purpose of sharing her son’s dancing video with friends and family.
Universal Music Corp. ("Universal") owns the copyright to the song “Let’s Go Crazy.”
Universal sent YouTube a Digital Millennium Copyright Act (“DMCA”) "takedown notice."
YouTube removed the video and sent Lenz notification that it had done so in response to Universal’s claims of copyright infringement.
Lenz sent YouTube a DMCA counter-notification claiming that her video was a fair use of “Let’s Go Crazy” and demanded that her video be re-posted.
YouTube re-posted the video six (6) weeks later.
Lenz filed suit against Universal alleging misrepresentation under the DMCA and tortious interference with her YouTube contract, while seeking a declaratory judgment of non-infringement.
Universal filed a motion to dismiss.

The Issue

Whether the DMCA requires a copyright owner to consider the fair use doctrine before issuing a takedown notice.

Arguments

Universal contends that copyright owners cannot be required to evaluate the question of fair use prior to sending a takedown notice – because fair use is merely an “excused” infringement, rather than an authorized use.
Lenz argues that fair use is an authorized use of copyrighted material, noting that the fair use doctrine itself is an express component of copyright law.

Court Decision – Issue of First Impression

Initially, the court pointed out that “fair use is a lawful use of a copyright.”
Therefore, in order to state a claim under the DCMA, the court found that the owner must evaluate whether the alleged infringing material makes fair use of the copyright.
The court concluded that Lenz sufficiently stated a claim under the DCMA by alleging that the copyright owner acted in bad faith by issuing the takedown notice without proper consideration of the fair use doctrine.

Summary

According to the court, this “interpretation of the DCMA furthers both the purposes of the [Act] itself and copyright law in general.”
As a result of this decision, before issuing a takedown notice, copyright owners will need to first evaluate whether an unauthorized use is “fair use” under the DCMA.