Many experts believed that the eCommerce industry would peak in 2011. However, it has been growing faster than anyone would have predicted. The industry reportedly grew 14.6% in 2015. It grew another 16% year-over-year in the third quarter of 2016.
Rapid industry growth creates new opportunities for online retailers. However, it has also attracted more scrutiny from regulators. Governments around the world have imposed new laws for a variety of reasons, including:
- Protecting consumers from unscrupulous merchants
- Limiting the competitive edge that online retailers have over their brick-and-mortar counterparts
- Combatting fraud
- Fighting money laundering
- Limiting access to potentially harmful products
Here are some legal issues online retailers must be aware of.
1. Online Sales Taxes
When Amazon first began selling products online, it didn’t have to pay sales tax. The law stipulated that only brick-and-mortar businesses needed to pay it.
Sales tax laws are now applied to online stores as well. Unfortunately, they vary from state to state and country to country. If you have a physical presence in a state, you may need to pay sales taxes regardless of where your customers are located.
In California, you may also be required to pay sales taxes if you have a representative in the state, even if your main office is based elsewhere. Some states will also require you to charge a sales tax if you sell to customers in their jurisdiction, even if your business is technically based elsewhere.
“Navigating sales taxes is challenging for all businesses,” says Ryan Kh, business development consultant and founder of Catalyst for Business.
“I encourage my clients to review sales data and see which states they receive the bulk of their sales. They may want to establish a physical presence in one of those jurisdictions to avoid the pains of double taxation online retailers often face. Of course, it depends on whether those states have a reasonable tax rate.”
2. Minimum Advertised Price
If you are selling products from another company, they may impose restrictions on advertising. One of the most common restrictions is the minimum advertised price policy many suppliers have.
If you enter into an agreement with a manufacturer, you must follow this policy carefully. According to an infographic by TradeVitality, there are a number of reasons MAP policies are enacted, including preventing merchants from engaging in price wars, which can put pressure on the manufacturer to lower their wholesale price.
It’s important to read the agreement with each supplier carefully. Never advertise a price below what they will allow.
3. Dealing with Fraudulent Payments
Fraudulent payments are a serious concern for online merchants. Unlike brick-and-mortar businesses, online retailers must usually accept liability for any fraudulent payments.
Why is the liability different for e-commerce companies? The law states that if a brick-and-mortar retailer uses a CHIP Reader, then it is not their responsibility to determine whether or not fraud took place. It’s up to the bank to monitor the account for fraudulent activity if the retailer took all reasonable precautions.
When an online retailer accepts payment, the transaction is classified as “card not present.” Since the retailer isn’t able to confirm the identity of the buyer, they usually assume the liability. If it is a fraudulent purchase, they will have to pay restitution to the cardholder.
However, this law is not absolute. It is usually based on the assumption that online retailers offer less security than the customers bank. If you can show that you have exceeded expectations with your online security, you may be able to shift the liability back to the bank.
“The liability shift protects the entity who offers the greater level of security by holding the other entity with less secure systems responsible for fraud,” said Carolyn Balfany, a safety expert with MasterCard.
However, it’s difficult to meet this burden, unless the customer has a lax bank that overlooked red flags of fraudulent activity.
“The one thing that merchants are going to have to struggle with, as long as we have cards that are chip and signature, we will see a shift to online fraud,” Mallory Duncan, senior vice president and general counsel at the National Retail Federation, told Yahoo Finance. “Merchants will have to put more roadblocks in the way of transactions in an effort to keep down the fraud occurring online.”
eCommerce companies are being more tightly regulated these days. They must be aware of all laws and take all reasonable precautions to abide by them.
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