Setting Up an Online Business

Reprinted from SBA.gov.

Setting up your business on the Internet can be a lucrative way to attract customers, expand your market and increase sales. For the most part, the steps to starting an online business are the same as starting any business. However, doing business online comes with additional legal and financial considerations, particularly in the areas of privacy, security, copyright and taxation.

Rules and regulations for conducting e-commerce apply mainly to online retailers and other businesses that perform consumer transactions by collecting customer data. However, even if you do not sell anything online, laws covering digital rights and online advertising may still apply to you.

The Federal Trade Commission (FTC) is the primary federal agency regulating e-commerce activities, including use of commercial emails, online advertising and consumer privacy. FTC’s Online Advertising and Marketing provides an overview of e-commerce rules and regulations.

The following topics provide further information on how to comply with laws and regulations related to e-commerce.

Protecting Your Customers’ Privacy

Learn the necessary steps you should take to protect your customers from identity theft and other misuses of their personal information. Any business that collects personal or financial data either through online sales, credit reports or applications should understand these rules and regulations.

Collecting Sales Tax Over the Internet

If you a run business with a physical storefront, collecting sales tax is pretty straightforward: you charge your customers the sales tax required by the jurisdiction where your business is located. For example, if you operate a retail store in Nashville, Tenn., you collect both state and local sales taxes from customers buying merchandise at your store.

But suppose you start selling your products online. Does that mean you charge them the same sales taxes that you do to those coming into your store? It depends.

If your business has a physical presence in a state, such as a store, office or warehouse, you must collect applicable state and local sales tax from your customers. If you do not have a presence in a particular state, you are not required to collect sales taxes. In legal terms, this physical presence is known as a “nexus.” Each state defines nexus differently, but all agree that if you have a store or office of some sort, a nexus exists. If you are uncertain, whether or not your business qualifies as a physical presence, contact your state’s revenue agency. If you do not have a physical presence in a state, you are not required to collect sales taxes from customers in that state.

This rule is based on a 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298, (1992)) in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. The Court reasoned that forcing sellers to comply with over 7,500 tax jurisdictions was too complex for sellers to manage, and would put a strain on interstate commerce.

Keep in mind that not every state and locality has a sales tax. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. In addition, most states have tax exemptions on certain items, such as food or clothing. If you are charging sales tax, you need be familiar with applicable rates.

Determining which sales tax to charge can be a challenge. Many online retailers use online shopping cart services to handle their sales transactions. Several of these services are programmed to calculate sales tax rates for you.

Digital Rights/Copyright

Personal data is not the only thing protected on the Internet. Digital works, including text, movies, music and art are copyrighted and protected via the Digital Millenium Copyright Act (DMCA). The DMCA offers a number of protections for information published to the Internet, as well as other forms of electronic information. Among its many provisions, the DMCA:

  • Limits Internet service providers from copyright infringement liability for simply transmitting information over the Internet. However, service providers, are expected to, upon notification, remove material from its web sites that appear to constitute copyright infringement.
  • Limits liability of nonprofit educational institutions for copyright infringement by faculty members or graduate students.
  • Makes it a crime to circumvent anti-piracy measures built into most commercial software. However, reverse engineering of copyright protection devices is permitted to conduct encryption research, assess product interoperability, and test computer security systems.
  • Provides exemptions from anti-circumvention provisions for nonprofit libraries, archives, and educational institutions solely for the purpose of making a good faith determination as to whether they wish to obtain authorized access to the work.
  • Outlaws the manufacture, sale or distribution of devices used to illegally copy software.
  • Requires that “webcasters” pay licensing fees to record companies.

The Lawyer Referral Service of the New Hampshire Bar Association can refer you to attorneys who specifically handle e-commerce matters.  Call 603-229-0002 or request a referral.