Sunday, December 30, 2012

Checklist for Launching a Retail E-Commerce Website for the Sale of Goods


This Checklist is a general guide for questions to answer and issues to consider for a seller designing, developing and launching a retail website to sell merchandise and other consumer products. For general information on setting up and operating a website, see Practice Note, Setting up and operating a website: Contractual issues.
 

Consider the Legal and Business Issues from the Start

When launching a retail e-commerce website, there are many legal and related business issues that a prospective seller must address. These issues fall within certain key areas, including:

Identify the Retailer of Record

  • Identify the entity that will be the retail seller of record for legal and tax purposes. If the retailer has an existing wholesale or brick-and-mortar retail business, it could operate the retail e-commerce store by using either:
    • its existing business entity; or
    • a separate affiliate or subsidiary.
  • When determining whether or not to set up a discrete business entity for the e-commerce operation, the retailer should consider whether its primary aim is to:
    • preserve administrative and operational efficiencies (which supports using its existing business entity); or
    • insulate existing business operations from the risks and uncertainties of a different and untested business model (which supports setting up a discrete business entity).
(For information on the selection of a form of business entity, see Choosing an Entity Comparison Chart.)

Select and Acquire the Goods

  • Select the type of goods the retailer intends to sell in the e-commerce store. They can be:
    • physical; or
    • a mixture of physical and digital.
  • If the retailer is the owner or manufacturer of the goods that it plans to sell, consider whether it should set up a procedure for making intra-company sales.
  • If the retailer is not a manufacturer of the goods it plans to sell, determine how it will procure the goods. The retailer can:
  • If the product offerings include any digital content (for example, mobile applications, music or video downloads, e-books, software or tickets to events), the retailer should ensure that:
    • it acquires all necessary intellectual property (IP) rights to the digital products; and
    • the e-commerce website and store design adequately supports the hosting and download of the digital products.
 

Determine the Sales Territory

  • Determine the territories that the e-commerce store will serve.
  • The retailer may decide to sell goods to consumers located:
    • only in the US; or
    • in the US and internationally.

International Sales

  • For international sales, the retailer can either:
    • develop separate stores accessible by links on the main storefront website to handle sales in foreign territories or regions (for example, local stores operated by its foreign affiliates); or
    • make all sales from one central store, regardless of customer location.
  • For any international sales, determine the requirements of applicable US and foreign laws. Areas to consider include:
    • export controls;
    • import and customs regulations;
    • sales or value added tax;
    • income tax;
    • product liability and product safety;
    • other consumer protection laws (including local language requirements, warranties, credit terms and other laws relating to online and mail order sales);
    • privacy and data protection;
    • consumer contract formation;
    • insurance;
    • intellectual property (including territorial scope of rights to all IP used on the website and protecting the retailer's own IP rights); and
    • dispute resolution (including issues relating to choice of law and foreign jurisdiction).
(For more information on cross-border legal issues, see Legal Compliance.)
 

Design and Develop the Website

 

Host the Website

  • Determine whether the retailer has the internal IT server capacity to host the e-commerce website and wishes to do so.
  • If not, the retailer typically enters into a website hosting agreement with a third-party service provider (see Standard Document, Website hosting agreement (pro-customer)).
 

Draft the Consumer-facing Legal Materials

Counsel for the retailer typically creates all of the consumer-facing legal materials to be posted on the e-commerce website, including:
 

Set up and Operate the E-Commerce Store

General Operation of the Store

  • Determine whether the retailer has the internal capacity and desire to operate the e-commerce retail website and handle order fulfillment.
  • If not, the retailer can enter into an e-commerce platform services agreement with a third-party service provider. These agreements, which often include a license to the service provider's proprietary e-commerce retail sale platform, cover the provision of various e-commerce services, such as:
    • warehousing of physical inventory;
    • order taking and processing;
    • payment and sales tax calculation and collection;
    • order fulfillment, including shipment of goods to purchasers, which may instead be covered under a separate fulfillment arrangement (see Order Fulfillment);
    • customer service;
    • handling of returns;
    • providing sales reports and consumer and data usage reports for transactions and traffic on the website; and
    • setting up procedures to comply with privacy and data security policies and legal requirements.
  • If the retailer outsources operation of the e-commerce store to a third-party service provider, determine the relationship between the retailer and the service provider. The service provider can:
    • act as the retailer's agent, which preserves the retailer's status as retailer of record for all consumer transactions; or
    • purchase inventory from the retailer (or receive inventory on consignment) and resell that inventory on its own behalf, which makes the service provider the retailer of record for all consumer transactions.
  • The retailer of record:

Shopping Cart Functionality

The retailer should ensure that the e-commerce store features shopping-cart functionality that covers all aspects of the sales process, including:
  • Comprehensive product descriptions and pricing and product availability information, including information about:
    • limited offers; and
    • pre-orders of products with future availability dates.
  • Use of geographical filtering technology (commonly referred to as geo-filtering) to:
    • prohibit sales of products outside selected selling territories; and
    • enforce any individual product territorial sales restrictions.
  • Click-through requirements for consumers to affirmatively "accept" the website's privacy policy and terms of sale before:
    • collecting any personally identifiable information; or
    • completing any sales transactions.
  • Order taking and order processing, including the generation of:
    • invoices;
    • order confirmations;
    • shipping notifications; and
    • delivery confirmations.
  • Requiring affirmative consumer marketing opt-ins or opt-outs.
  • Applying promotional codes and handling coupon redemption.
  • Billing and charging in local currency for all purchases, including associated shipping and handling charges.
  • Calculating and collecting sales tax on applicable products in all states or territories in which the retailer must collect and remit these taxes. For information on whether an out-of-state retailer must collect sales tax, see State Q&A: Sales and Use Taxes: New Jersey, Ohio, California and Texas.
  • Securely processing each transaction payment from the consumer's selected credit card, debit card or other permitted payment mechanism (for example, PayPal) (see Practice Note, E-Commerce Payment Mechanisms).
  • Providing customer service and support, including:
    • supplying all service-related customer-facing information (for example, contact information, FAQs, order status and tracking information, shipping options and rates and customer service policies); and
    • processes to respond to customer inquiries and complaints.

Sales Tax Calculation, Collection and Remittance

Ensure that the retailer and the e-commerce store are properly set up to handle sales tax obligations. Considerations include:
  • Determining the jurisdictions in which the retailer must collect sales tax (often referred to as having sales tax nexus), which may include different jurisdictions from those relating to the retailer's other businesses. (See State Q&A: Sales and Use Taxes: New Jersey, Ohio, California and Texas.)
  • Registering with each applicable sales tax authority.
  • Determining which categories of purchases require calculation and collection of sales tax (based on type of product).
  • Determining whether sales tax must be charged on shipping and handling charges.
  • If the retailer has outsourced the store's operation, providing accurate collection instructions to the store operator for software encoding.
  • Collecting accurate information for all sales taxes collected in each jurisdiction.
  • Creating a process to timely file and pay state sales taxes.
  • Having the ability to revise and update e-commerce sales tax functionality as online sales tax laws and regulations evolve.

Payment Processing

  • Unless the retailer has an existing merchant account, it must enter into a merchant processing agreement with a payment processor (for example, Paymentech or iPayment) to set up a merchant account. This account:
    • enables the retailer to accept credit cards, debit cards and other types of electronic payment from purchasers; and
    • assists the retailer in cash collection and management.
  • Determine whether the merchant processing agreement includes electronic payment gateway services. If not, the retailer must enter into an agreement with a payment gateway service provider (for example, authorize.net or Payflow) acceptable to the retailer's payment processor. Electronic payment gateway services involve:
    • authenticating the customer's credit card information; and
    • obtaining authorization for payment from the customer's bank or credit card association.

Order Fulfillment

  • Determine how the retailer will handle order fulfillment to customers in a broad range of locations.
  • If the retailer owns or leases a warehouse with available capacity and the personnel to staff a fulfillment operation, it may need to either:
    • enter into one or more shipping arrangements with selected carriers; or
    • revise the terms of any existing shipping agreements to cover single-item and other low-volume shipments.
  • If the retailer does not have warehousing or other fulfillment capability and capacity, unless it has entered into an e-commerce services agreement that covers inventory storage and order fulfillment, the retailer must enter into a product fulfillment arrangement with an appropriate distributor or product fulfillment service provider. These agreements usually cover:
    • warehousing of inventory;
    • picking, packing and shipping inventory; and
    • processing of returns.
  • If any of the products are digital, determine whether the retailer can (and wants to) host the digital content and fulfill digital sales to e-commerce customers. This service may be covered by an existing third-party service provider arrangement also applicable to physical goods.
  • If not, the retailer typically enters into a digital fulfillment arrangement with a third-party service provider. These agreements cover a number of services, mainly including:
    • hosting digital product masters;
    • encoding digital products for sale;
    • distributing digital products (and any customer usage rules or click-through licenses) when a sale is made in the e-commerce store; and
    • securing and otherwise protecting digital masters.
 

Miscellaneous

Insurance

Determine whether the retailer and each of its service providers have adequate insurance coverage. Applicable coverage often includes:
  • Commercial general liability, including property damage and personal injury, and advertising injury.
  • Errors and omissions.
  • Workers' compensation and employer liability.
  • Directors' and officers' liability.
For more information on insurance coverage, see Insurance Policies and Coverage Toolkit.

Advertising and Marketing

  • Consider whether to participate in one or more self-regulatory direct marketing programs (for example, membership in the Direct Marketing Association and certification under the TRUSTe Privacy Program). For more information, seePractice Note, Direct Marketing: Self-Regulation and Codes of Practice.
  • Determine whether the retailer will include banner, pop-up or other types of website advertising to generate additional revenues on the e-commerce website. If so, the retailer should consider entering into an internet advertising agreement with a third-party service provider. These agreements provide for:
    • the placement of advertising on the website; and
    • participation in the fees generated by the online advertisers.
 
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Complete a Full Technical, Business and Legal Compliance Audit

Technical Functionality

The retailer should confirm that all technical aspects of the website are working as intended, for example, confirming that each aspect of the shopping cart actually works and properly calculates correct payment amounts, including:
  • Shipping and handling charges.
  • Requisite sales taxes.

Business Terms

The retailer should ensure that:
  • The terms of sale capture every aspect of the desired business model.
  • All pricing, shipping and handling charges are accurately and consistently reflected in each step of the sales process.

Legal Compliance

Counsel should audit the project to ensure that:
  • All agreements relating to the creation, ownership and operation of the website are fully negotiated, executed and delivered.
  • All website content is cleared for commercial use.
  • The website, the e-commerce store and its operation comply with all applicable laws and contractual obligations (seeLegislation Governing Liability for Website Content Checklist).
Applicable areas of law include:
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