TCS Daily

Regulating the Ether

By James Justin - May 27, 2003 12:00 AM

For years, homeowners have been selling their brick-and-mortar homes through brick-and-mortar real-estate firms. Some ambitious owners have chosen to forgo the firms and their exorbitant commission altogether and sell their home themselves. But besides a few yard signs and local classified ads, homeowners have had few opportunities to promote their homes without hiring a certified Realtor.

Realtors have always had the housing market cornered; even the title "Realtor" is a registered mark of the National Association of Realtors. Between lobbying for local licensing regulations and their own internal rules, real-estate agents have established a monopoly in the housing industry. In particular, the MLS system, which is the primary tool used by real-estate agents to find homes listed by other agents, has been wholly inaccessible to independent homeowners.

The internet has changed all of this. For a relatively small fee, websites like and Yahoo's real-estate website now allow homeowners to advertise their homes to a national audience and list them on the MLS system. According to Colby Fambrotto,'s owner, his company has seen geometric growth since 1999, and continues to expand. This has understandably irked some in the real estate industry.

Realtors responded by pressuring the states to enforce licensing regulations on internet real estate websites. Most recently, the State of California sent a letter to among other websites informing them that they could no longer list homes for sale without a certified Realtor's license. The state argued that since the site was accessible to California residents and listed Californian homes, it falls within Californian jurisdiction, even though the site operates out of New York. In response, the Institute for Justice is suing the state of California for violation of's First Amendment right to commercial speech.

Whether it is selling homes, books, or other products and services, the internet has created a new form of free market competition. With lower overhead and greater flexibility, dot-coms have forced many brick-and-mortar firms to reevaluate their practices. Unfortunately, many brick-and-mortar organizations have resorted to lobbying for local regulations to restrict the market and stifle competition with dot-coms.

The very nature of the internet transcends traditional geographic boundaries. Without knowing it, a user's signal may bounce around the globe on its way to a local website. In the realm of a federal system, this presents wholly unforeseen problems of jurisdiction. California's real estate licensing regulation is only one more example of an increasing number of state and local regulations that call into question the role - or lack - of federal leadership on the internet.

The traditional states' rights view of federal leadership is that states can - and in many cases should - serve as democratic laboratories, each breeding the most innovative, efficient, and competitive legislation possible. But this approach of regulation is incongruent with the nature of the 'net. Without boundaries, each state's regulations spill over, creating a race to the bottom in terms of innovation and competition, until finally, internet content providers must satisfy the lowest common denominator to avoid prosecution.

Consider the patchwork of state anti-spam legislation. Few quarrel with the intention of state legislators to cut down on unsolicited bulk e-mail; the problem is the states' inconsistency. Currently 27 states have passed anti-spam regulations, but each has different requirements, mandates, and punishments. The only way of complying with all of them is to not send SPAM to begin with.

And while this may seem like a boon for internet users who have grown tired of sorting through their email, it sets a dangerous precedent for other regulations. With regard to other forms of speech, a single state law can conceivably control the entire internet.

This is what happened when Georgia passed a bill restricting anonymous speech on the internet. The Georgia Computer Systems Protection Act made sending an anonymous email or using a pseudonym on the internet a crime. Furthermore, Georgia asserted that it could apply this statue to anyone who sent an email to a Georgia resident or even anyone whose message was relayed through a computer in Georgia.

Under the Georgia statue, many of the Founding Fathers, who often used pseudonyms like "Cato" and "Publius" for fear of prosecution, would be guilty of committing fraud or worse.

The ACLU challenged the Georgia law on First Amendment grounds and won an injunction, but the district court opinion did nothing to rectify the jurisdictional problem and left the door open to more state regulations. On the same day that the Georgia decision was handed down, a judge in New York ruled that the state could not pass its own version of the Communications Decency Act, regulating indecent material on the internet.

U.S. District Judge Loretta A. Preska wrote that a borderless world requires special jurisdictional consideration. "The Internet is one of those areas of commerce that must be marked off as a national preserve to protect users from inconsistent legislation that, taken to its most extreme, could paralyze development of the Internet altogether. Only Congress can legislate in this area," she wrote.

But her decision is an exception to the rule. Many other state laws have passed judicial rigor. The trouble with these regulations is that instead of maximizing constitutional liberties - like free speech - many states compete to regulate them. In other areas, state competition is justified, but only when they compete to benefit the market.

For instance, at this point it appears that internet taxes are a real possibility. The federal moratorium against them has expired, and the odds of an extension are slim. Faced with budget deficits and waning sales tax receipts, states see internet taxes as an attractive source of revenue. The problem is that many states have imposed use taxes, which require consumers to pay taxes on products purchased outside the state. Supreme Court jurisprudence and the Constitution itself restrict levying taxes on another state's commerce. Additionally, use taxes also run the risk of double taxation when a consumer buys a product from a state with an origin-based sales tax. Such a system might even create a race to the top, where each state must institute similar use taxes to protect its own commerce.

Assuming state internet taxes are inevitable, to rectify these problems the states could uniformly impose origin-based sales taxes, where consumers pay taxes to the state within which the corporation is located. Origin-based taxes also breed healthy competition between the states to keep taxes low. Unfortunately, the federal government has done little to breed any uniformity. Aside from an already expired moratorium on internet taxation, the federal government has shirked its responsibility to exercise its dormant jurisdiction on this issue.

Whether its commerce or speech, the states have created a quandary of sorts. In order to comply with the patchwork of legislation, corporations must comply with the lowest common denominator or face state prosecution. In doing so, they have eliminated many new forms of commercial competition and innovation. In the case of, this may mean shutting down or restricting access to their website - either way, they'd be forced out of competition. At this point, only federal leadership - not necessarily regulation - can make sense of this mess of local bureaucratic regulations.

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