TLJ News from April 11-15, 2008

FTC Receives Comments Regarding Online Behavioral Advertising

4/15. Numerous companies, trade groups, and others filed comments with the Federal Trade Commission (FTC) in response to its December 20, 2007, staff document [7 pages in PDF] titled "Online Behavioral Advertising: Moving the Discussion Forward to Possible Self-Regulatory Principles".

The FTC's document stated it uses the term "behavioral advertising" to mean "the tracking of a consumer’s activities online including the searches the consumer has conducted, the web pages visited, and the content viewed in order to deliver advertising targeted to the individual consumer’s interests." It then proposed five principles, and requests public comments.

For a summary of the FTC' proposed principles, see story titled "FTC Proposes and Seeks Comments on Voluntary Principles for Online Behavioral Advertising" in TLJ Daily E-Mail Alert No. 1,691, December 19, 2007.

The Center for Democracy and Technology (CDT) and other groups submitted a comment [27 pages in PDF] in which they argued that "the current self-regulatory framework has failed to protect consumer privacy".

The CDT wrote that the "FTC's proposed principles are a promising start, but much more work is needed -- and much more information about how behavioral advertising is actually taking place -- before consumers will be sufficiently protected online."

The Center for Digital Democracy (CDD) and U.S. Public Interest Research Group submitted a comment [37 pages in PDF] in which they complained that the FTC "has been largely incapable to take a meaningful stand on data collection and interactive marketing". They argued that "the time for regulation is here -- but not merely self-regulation".

They proposed that the FTC "must establish as a rule that consumers must be offered opt-in before any data are collected (with the exception of underage individuals governed by the COPPA statute). All data collection, from "cookie" to pixel tag to IP address, etc., requires an affirmative prior consent. The request for an opt-in must be accompanied by an understandable explanation on what data are being collected, how it will be used, the controls that users have over it (removing or correcting data, for example), the retention period, what transmission to other parties or affiliates are involved (ad networks, ad auctions, etc.). The commission needs to bring up to date its definition of personally identifiable information to include IP addresses and cookie information." (Parentheses in original.)

Google, which pursues business models built on online advertising, asserted in its comment [11 pages in PDF] that "online advertising is a critical building block for free expression on the web, the success of businesses of all sizes operating online, and the well-being of the Internet economy". Google argued for a "self-regulatory approach".

Microsoft also submitted a comment [31 pages in PDF] advocating industry self-regulation. See also, comment [15 pages in PDF] of the Interactive Advertising Bureau (IAB), which represents Google, Yahoo, MSN, and others.

eBay submitted a comment [9 pages in PDF]. It is not an ad network. However, it offers product search in its web site, and manages promotional content. eBay noted that while some of the FTC's proposed principles apply to "advertising", content and advertising are interrelated, and it can be hard to distinguish what is advertising.

eBay concluded that "we are concerned that the breadth and detail of the principles the Commission has proposed will inhibit industry innovation on the internet at the expense of illusory consumer value".

The Newspaper Association of America (NAA) wrote in its comment [17 pages in PDF] regulation, if applied to online newspapers, could violate the First Amendment of the Constitution.

It urged the FTC "to affirm the indispensable role of advertising in supporting free content. The Commission should also avoid endorsing principles that would impair newspapers’ ability to attract advertising or manage the operations of their websites. Finally, the Commission should recognize that the First Amendment severely limits governmental efforts to regulate the editorial judgment of newspaper publishers, editors, reporters, and advertisers."

The NAA argued that the FTC "has ignored significant constitutional issues raised by the proposed behavioral targeting principles. The proposed principles -- which concededly are intended to set a national standard, and which presumably the agency would in the future use as a basis for consent decrees and other enforcement actions -- would have profound constitutional implications if applied to online newspapers."

The NAA warned the FTC that any "efforts to restrict or limit what newspaper websites publish, and the basis by which editors and advertisers make decisions regarding what to publish, run directly counter to core First Amendment rights, and can amount to a form of prior restraint."

The Software and Information Industry Association (SIIA) wrote in its comment [PDF] that "the proposed principles are a ``one-size-fits-all´´ approach that will not work, as either a basis for further dialogue on self-regulation, or for undertaking enforcement actions."

It added that the "SIIA strongly urges that if the FTC intends to establish a basis for engaging self-regulatory efforts or for developing an enforcement framework that it initiate a formal Notice of Proposed Rulemaking procedure to promulgate such principles."

AT&T submitted a comment [7 pages in PDF] in which it advocated self regulation. Verizon also submitted a comment [8 pages in PDF] advocating self-regulation.

Peter Swire (Ohio State University law professor) and Annie Anton (North Carolina State University computer science professor) submitted a comment [10 pages in PDF] focusing on the use of opt out cookies for consumers who wish not to participate in behavioral profiling.

See also, FTC's web page with hyperlinks to filed comments.

House to Consider Tax Bill That Removes Cell Phones From IRC 280F

4/14. The House Rules Committee (HRC) approved a rule for consideration of HR 5719 [LOC | WW], the "Taxpayer Assistance and Simplification Act of 2008". Also, Rep. Steny Hoyer's (D-MD) schedule for Tuesday, April 15, 2008, provides for consideration by the full House of HR 5719.

This bill would, among other things, remove the clause "any cellular telephone (or other similar telecommunications equipment)" from the enumeration of "listed property" in Section 280F of the Internal Revenue Code. The Internal Revenue Service (IRS) is now asserting that it can compel taxpayers to treat the use of cell phones and other devices paid for by employers as income to employees.

See, stories titled "IRS Initiative Taxes Employees for Use of Work Cell Phones and Other Devices" and "Bills Introduced to Stop IRS from Taxing Employees for Work Cell Phones and Other Devices" in TLJ Daily E-Mail Alert No. 1,745, April 11, 2008.

The HRC approved a closed rule, that provides for one hour of debate, no amendments, and a vote on the amendment in the nature of a substitute [27 pages in PDF] recommended by the House Ways and Means Committee (HWMC).

The HWMC amended and approved HR 5719 on April 9, 2008. The vote on approval was 23-17. The amendment in the nature of a substitute leaves unchanged Section 3 of the bill as introduced, which amends Section 280F.

Also, Section 13 of the bill provides for IRS notification to taxpayers of suspected identity theft.

It provides that "If, in the course of an investigation under the internal revenue laws, the Secretary determines that there was or may have been an unauthorized use of the identity of the taxpayer or a dependent of the taxpayer, the Secretary shall, to the extent permitted by law ... as soon as practicable and without jeopardizing such investigation, notify the taxpayer of such determination ..."

IRS Initiative Taxes Employees for Use of Work Cell Phones and Other Devices

4/14. The Department of the Treasury's (DOT) Internal Revenue Service (IRS) published a document in January of 2008 regarding use of cell phones and other communications devices by employees. It states that "If records are not kept of business and personal use, the value of all use is included in the wages of the employee".

That is, if employers provide employees with cell phones or other devices, and require employees to carry them, the IRS seeks to impose the record keeping requirements of its substantiation statute, which requires "the amount of such expense or other item", "the time and place of the ... the facility or property", "the business purpose of the expense", and "the business relationship to the taxpayer of persons entertained". IRS regulations strongly suggest contemporaneous recording.

If these requirements are not met, then the entire cost of both the device and the service must be treated as income to the employee. And, the employee must pay taxes on these devices and services. It must be added to the base used to calculate withholding. The employees must pay income taxes on what is in essence a business expense of the employer.

The IRS has put out little information. There is the IRS's January 2008 document [91 pages in PDF] titled "Taxable Fringe Benefit Guide". However, it contains only a few paragraphs on communications devices. The IRS asserts that its new position is supported by two sections of the Internal Revenue Code (IRC). It first relies upon 26 U.S.C. § 280F(d)(4), which subjects cell phones to the same scrutiny as big ticket corporate perks such as limousines. It also relies upon 26 U.S.C. § 274(d), which provides the rules for substantiating business use over these items. It also relies upon implementing regulations.

TLJ has long since requested, but not received, interviews with persons at the IRS and DOT's Office of Tax Policy regarding this topic.

Capitol Hill staff relate that the Congress is hearing from representatives of affected taxpayers regarding this subject. They state that the IRS has instructed its field examiners to enforce the above cited IRC sections against the users of cell phones and other communications devices.

These IRC sections are directed at big ticket corporate benefits, such as limousines, jets, skyboxes, and club memberships, that provide personal, non-business, benefits to the recipients, who are usually senior executives. However, the Congress added cell phones to the list of covered corporate perks back in 1989. Now, the IRS asserts that companies and individuals must document the business purpose of each and every call or message. If not, the entire cost must be treated as income to the employee, including low paid rank and file employees.

This new IRS position has promoted members of Congress to introduce bills. See, related story in this issue titled "Bills Introduced to Stop IRS from Taxing Employees for Work Cell Phones and Other Devices".

TLJ also intends to publish an article in a forthcoming issue titled "Analysis of IRS Authority to Tax Employees for Communications Devices and Services".

Bills Introduced to Stop IRS from Taxing Employees for Work Cell Phones and Other Devices

4/14. Several bills have been introduced in the House and Senate that would remove "any cellular telephone (or other similar telecommunications equipment)" from the enumeration of "listed property" under Section 280F of the Internal Revenue Code.

At issue is whether the Internal Revenue Service can treat the use of cell phones and other devices paid for by employers as income to employees, as well as record keeping and data retention requirements imposed upon employers and employees.

On February 14, 2008, Rep. Sam Johnson (R-TX) introduced HR 5450 [LOC | WW], the "Modernize Our Bookkeeping In the Law for Employee's Cell Phone Act of 2008" or "MOBILE Cell Phone Act of 2008". There are currently 36 cosponsors. It was referred to the House Ways and Means Committee, of which Rep. Johnson is a senior member.

On February 26, 2008, Sen. John Kerry (D-MA) and Sen. John Ensign (R-NV) introduced S 2668 [LOC | WW], a substantially identical bill with the same title. It was referred to the Senate Finance Committee. Sen. Jim Bunning (R-KY), Sen. Charles Schumer (D-NY), and Sen. Maria Cantwell (D-WA) are also cosponsors of the bill.

On April 8, 2008, Rep. Charles Rangel (D-NY), the Chairman of the House Ways and Means Committee, and others introduced HR 5719 [LOC | WW], the "Taxpayer Assistance and Simplification Act of 2008". This is a broad bill that includes language similar to HR 5450 and S 2668.

No action has been taken on any of these bills. However, the House Democratic leadership has scheduled floor consideration of HR 5719 for as early as April 15, 2008. See, Rep. Hoyer's schedule for week of April 14.

See, full story.

Commentary: Excise Tax and 280F Regime Compared

4/14. Perhaps it should also be noted here that the IRS's recently abandoned attempts to impose a 3% excise tax on certain communications services not covered by the applicable statute is similar to the IRS's new initiative to tax employees under the § 280F regime. See, related story in this issue titled "IRS Initiative Taxes Employees for Use of Work Cell Phones and Other Devices".

First, both tax users of telecommunications services.

Second, both are based on obsolete statutes.

Third, both statutes have purposes that no long apply. The excise tax began as a tax on a luxury product to fund the Spanish American War, which began in 1898. The 1989 § 280F cell phone tax amendment was an attempt to soak rich people when only rich people had access to cell phones.

Fourth, both taxes are regressive.

Fifth, the IRS's implementation of the excise tax was challenged in court and held unlawful, while the IRS's authority to impose its new § 280F tax regime on wireless services is suspect, and may face legal challenges.

House Judiciary Committee to Hold Hearing on Bill to Provide Federal Funding to Schools for Surveillance Equipment

4/14. The House Judiciary Committee (HJC) announced that its Subcommittee on Crime, Terrorism, and Homeland Security will hold a hearing on April 17 on three bills, including HR 2352 [LOC | WW], the "School Safety Enhancements Act of 2007". See, HJC notice.

This bill would, among other things, amend 42 U.S.C. § 3797a to authorize the Department of Justice (DOJ) to provide grants to public elementary and secondary schools for "surveillance equipment".

The statute already provides for grants to schools for "metal detectors" and "Any other measure that, in the determination of the Attorney General, may provide a significant improvement in security".

This bill does not define the term "surveillance equipment". Nor is there any enumeration of types surveillance  equipment that is either included, or excluded, from this grant program. For example, the bill does not reference cameras and other video surveillance equipment, equipment for intercepts of phone or internet communications, or equipment used to access data stored on computers.

Title 42 pertains to health and welfare. Section 3797a pertains to federal grants to schools for school security. It may also be significant that this bill amends the Omnibus Crime Control and Safe Streets Act of 1968, Public Law No. 90-351, as amended, which also authorizes wiretaps, bugs, pen register or a trap and trace devices, and accessing of computers and stored records. For example, for intercepts, see 18 U.S.C. § 2511 and 18 U.S.C. § 2516.

This bill was introduced by Rep. Steven Rothman (D-NJ) on May 16, 2007. The companion bill in the Senate is S 1217 [LOC | WW].

This hearing is scheduled for 10:00 AM on April 17 in Room 2141 of the Rayburn Building. The HJC will webcast the hearing.

More News

4/14. The Supreme Court denied certiorari in Chemject International v. Southwestern Bell Telephone, Sup. Ct. No. 07-859. This lets stand the January 25, 2007, opinion of the Court of Appeals of Texas, Thirteenth District (No. 13-04-567-CV). Also, the Supreme Court of Texas denied a petition for review on September 28, 2007. This is a class action regarding SBC's customer billing. See, Orders List [18 pages in PDF] at page 3, and Supreme Court Docket.

4/14. The U.S. Patent and Trademark Office (USPTO) announced in a release that beginning on April 28, 2008, it will institute a "six-month pilot program that will allow an applicant to have an interview with the patent examiner prior to the first Office action on the merits in a new utility application." The USPTO added that "The First Action Interview Pilot program will expedite prosecution of the patent application by enhancing the interaction between the applicant and the examiner, providing the applicant an opportunity to resolve patentability issues one-on-one with the examiner at the beginning of the review process."

4/14. Commissioner Paul Atkins of the Securities and Exchange Commission (SEC) gave a speech in Rio de Janeiro, Brazil. He stated that the philosophy at the SEC is that "the SEC ought not apply our laws to purely foreign transactions". But, he added, "twenty years from now, after more technological change, it may be impossible to say where shares are traded." He also stated that the SEC has "proposed rule changes related to disclosures by foreign private issuers who already file with us. Among other things, the amendments would eliminate all requirements for paper filings. Investors would instead have access to documents in English on the Internet, and companies would also save time and money through electronic filing." He also discussed Sarbox 404, IFRS, and U.S Brazil relations.

SEC General Counsel Predicts SEC Will Soon Propose Making XBRL Mandatory

4/12. Brian Cartwright, General Counsel of the Securities and Exchange Commission (SEC), gave a speech in Dallas, Texas, in which he addressed interactive data.

He said that "I predict a release proposing that reporting companies be required to use XBRL in their filings will be considered by the Commission in the near future. That means that if you haven't already become familiar with XBRL, you won't be able to procrastinate much longer."

The SEC's interactive data program is currently voluntary.

He spoke at an American Bar Association (ABA) convention. Most of the audience was lawyers. Hence, most of his speech was dedicated to explaining interactive data in non-technical terms, and arguing that it will not complicate the work of securities lawyers.

He offered an overview of what interactive data and eXtensible Business Reporting Language (XBRL) are. He said that "XBRL is just a set of rules for attaching identifying codes to items of financial information. In the jargon of XBRL, these identifying codes are called "tags." Think of it as bar-coding for financial information."

He continued that "once identifying codes have been attached to each item of financial information in a company's SEC filing, computer software can search for and retrieve any of those items simply by searching for the corresponding tag -- and do the same with hundreds or thousands of other filings more or less instantly."

Then, "once software has collected information in this way from a filing -- or a lot of filings-the software can do all the wonderful things software can do with the data it has identified: make graphs, charts, tables, plots, summaries, calculations, lists -- whatever is useful to a user."

He said that securities lawyers will not "need to know what the codes look like."

He asked a rhetorical question: "how hard is it going to be for your clients to tag their financial data?" He then answered his question: "The answer is: not hard at all, even the first time. And easier thereafter."

He added that "in time many companies will be using accounting software that includes XBRL data tagging as an integral part of the system. That will make it cheaper and easier for those companies to prepare their financial statements in the first place, with far less risk of human error. And the financial statements that are produced by that software then will have been tagged automatically."

FCC Enforcement Bureau Recommends Denial of § 222 Complaint Against Verizon

4/11. The Federal Communications Commission (FCC) released the Enforcement Bureau's (EB) document [13 pages in PDF] titled "Recommended Decision" on a complaint submitted by Bright House Networks, Comcast and Time Warner Cable against Verizon alleging violation of 47 U.S.C. §§ 201 and 222 in connection with Verizon's alleged use of proprietary information of other carriers that it receives in the local number porting process. The complainants allege that Verizon uses this information for customer retention marketing.

47 U.S.C. § 222 limits the use and dissemination by telecommunications carriers of customer proprietary network information (CPNI).

The document, which is signed by Kris Montieth, Chief of the EB, recommends that the FCC deny the complaint as to Section 222, but conduct a rule making proceeding regarding customer retention marketing practices.

Subsection 222(a) provides in full that "Every telecommunications carrier has a duty to protect the confidentiality of proprietary information of, and relating to, other telecommunication carriers, equipment manufacturers, and customers, including telecommunication carriers reselling telecommunications services provided by a telecommunications carrier."

Subsection 222(b) provides, in full, that "A telecommunications carrier that receives or obtains proprietary information from another carrier for purposes of providing any telecommunications service shall use such information only for such purpose, and shall not use such information for its own marketing efforts."

The EB document states that "Section 222(b) does not expressly state whose provision of telecommunications services is covered. Specifically, section 222(b) does not expressly state whether its marketing ban applies when the receipt of proprietary information is for purposes of (i) the receiving carrier (here, Verizon) ``providing any telecommunications service,´´ or (ii) the submitting carrier (here, a Competitive Carrier) ``providing any telecommunications service,´´ or (iii) either the submitting carrier or the receiving carrier ``providing any telecommunications service.´´ Verizon contends that the first construction is the correct one, arguing that section 222(b) applies only when a carrier receives another carrier's proprietary information so that the receiving carrier can provide a telecommunications service. Complainants advocate the third construction, asserting that ``section 222(b) encompasses any carrier-to-carrier service regardless of which carrier is providing it or to whom.´´" (Parentheses in original. Footnotes omitted.)

The document concludes, "We recommend that the Commission adopt the construction advocated by Verizon, because that construction provides the most natural, grammatically consistent reading of the statute."

It reasons that "Verizon’s role in the number porting process does not constitute the provision of a ``telecommunications service´´ ..."

The document recommends that the FCC deny counts of the complaint that allege that Verizon's customer retention marketing practices violate either Subsections 222(a) or 222(b). The document adds that the allegation of violation of Section 201 will be addressed in a forthcoming order.

This document is numbered DA 08-860.

GAO Reports on Growth of Media and Regulation of Media Ownership

4/11. The Government Accountability Office (GAO) released a report [69 pages in PDF] titled "Media Ownership: Economic Factors Influence the Number of Media Outlets in Local Markets, While Ownership by Minorities and Women Appears Limited and Is Difficult to Assess".

This report contains the conclusion that "the overall growth in the communications industry and the emergence of the Internet have provided unprecedented levels of media choices to the American public." It also concludes that "local and national consolidation and operating agreements ...reduce the number of independent voices".

This report primarily focuses on media ownership laws, and the older media, the ownership of which is regulated by the Federal Communications Commission (FCC), including broadcast television and radio, newspapers, cable, direct broadcast satellite (DBS).

This report contains little on new internet based media.

The report finds that "Since the 1970s, the number of media outlets has increased dramatically, with large increases in the number of television and radio stations. In the case of television, the number of full-power television stations increased from 875 in 1970 to 1,754 in 2006".

It reports that "Since the 1970s, the number of households subscribing to a multichannel video program distributor (MVPD) has increased significantly, thereby increasing the programming options available to many households. The two most prominent MVPD platforms are cable and direct broadcast satellite (DBS) services. Since 1975, the number of households subscribing to cable service has increased from approximately 10 million to nearly 66 million in 2006, and since 1995, the number of households subscribing to DBS service has increased from 2.2 million to over 29 million in 2006." (Footnote omitted.)

However, it states that "Daily newspapers illustrate a different trend -- decreasing from 1,763 in 1970 to 1,447 in 2006."

The report finds that "The numbers of media outlets and owners of media outlets generally increase with the size of the market, although operating agreements may reduce the effective number of independent outlets. Markets with large populations have more radio and television stations and newspapers than less populated markets."

It adds that "In more diverse markets, we also observed more radio and television stations and newspapers operating in languages other than English, which contributed to a greater number of outlets."

It also reports that "Some companies participate in agreements to share content or agreements that allow one entity to produce programming or sell advertising through two outlets, among other agreements. In our review, these agreements were prevalent in a variety of markets but not in the top three markets, suggesting that market size may influence the benefits that firms achieve through such arrangements. To some degree, these agreements may suggest that the number of independently owned media outlets in a market might not always be a good indicator of how many independently produced local news or other programs are available in a market."

The report finds that "Ownership of broadcast outlets by minorities and women appears limited, but comprehensive data are lacking."

The report relates the views of media outlets and others on media ownership laws. However, the report does not make its own recommendations. It does recommend that the FCC "identify processes and procedures to improve the reliability of FCC’s data on gender, race, and ethnicity"

New Media. The report largely fails to address the nature, scope, use, or policy consequences of new internet based types of media.

It states at the outset that "we observed few independent news Web sites in our case study markets, as most of the Web sites that we found were affiliated with one or more traditional media outlets."

The body of the report provides this elaboration. "The Internet delivers content from a virtually limitless supply of sources. For example, while residents of New York can read The New York Times, residents in Harrisonburg with access to the Internet also can read this publication. Most of the traditional media outlets -- newspapers, radio stations, and television stations -- in our case study markets maintain a Web site. This provides another means for residents to access the content of these outlets. However, we identified few news Web sites in our case study markets that were unaffiliated with the traditional media outlets."

It continues that "While there are many blogs and Web sites, when we spoke with stakeholders about assessing the number of "voices" in a media market, there was no consensus on how to count Internet outlets. Some stakeholders said that audience size was less important than the existence of many potential voices, while other stakeholders said that voices on the Internet mattered only when they reached an audience above a certain minimum size. Further, some stakeholders said that journalistic content was important, such as that arising from news gathering and investigations."

The report states at the outset that "stakeholders reported that technological factors, such as the emergence of the Internet, have facilitated entry for new companies, thereby increasing the amount of content and competition. However, stakeholder opinions varied over the significance of new media entrants, such as individual Web pages and blogs."

The report then elaborates that "New technologies appear to facilitate entry, thereby promoting new content and competition. In particular, the Internet provides new opportunities for individual citizens and companies to produce their own Internet publications with little investment. For example, individuals and companies no longer need to acquire a broadcast license and invest in broadcast facilities to distribute content to a wide audience. Forty-four stakeholders told us that the Internet creates an abundance of outlets, while only 17 disagreed."

"Additionally, 67 of 102 stakeholders mentioned competition from new entrants from the Internet or new telecommunications services as a factor influencing media ownership. For example, six newspaper industry stakeholders reported that industry revenues have suffered from the availability of low-cost or free classified advertising services available on the Internet."

It should be noted too the most of the "stakeholders" consulted by the GAO are representatives of old media. They are listed in an appendix to the report. The GAO did not attempt to obtain a wide survey of new media entities.

Finally, the GAO report states that "While many stakeholders reported that the Internet creates an abundance of outlets, opinions varied as to the significance of these outlets. For example, several stakeholders cited increases in the number of outlets available on the Internet, such as blogs, but said there is little evidence that these outlets are widely read or are journalistic substitutes for newspapers. Similarly, several other stakeholders estimated that a significant portion of the content available on these Web sites originates from large, established media firms such as newspapers."

Go to News from April 6-10, 2008.