Overstock.com 2010 Annual Report Download - page 35

Table of Contents
The security risks or perception of risks of e-commerce may discourage customers from purchasing goods from us.
In order for the e-commerce market to continue to develop successfully, we and other market participants must be able to transmit confidential
information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any
breach of our e-commerce security systems could cause customers to lose confidence in the security of our Website and choose not to purchase from our
Website. Likewise, if there is a breach of e-commerce security systems operated by another large e-commerce retailer, whether or not the breach affected the
systems we operate such a breach could cause could also cause our customers to lose confidence in the security of our site as well. If someone is able to
circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy of
transactions over the Internet could inhibit the use of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining
improper access to our information. Third parties may target our customers directly with fraudulent identity theft schemes designed to appear as legitimate
communications from us. Any security breach or fraud perpetrated on our customers could expose us to increased costs and to risks of loss, litigation and
liability and could seriously disrupt our operations. Similar activities targeting other large e-commerce sites, if successful, could similarly cause serious
disruption to our operations and business.
Credit card fraud could adversely affect our business.
We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so the failure to
adequately control fraudulent credit card transactions could reduce our net revenues and our gross profit percentage. We have implemented technology to help
us detect and reject the fraudulent use of credit card information. However, we may in the future suffer losses as a result of orders placed with fraudulent
credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for
fraudulent credit card transactions because we do not obtain a cardholder's signature. If we are unable to detect or control credit card fraud, our liability for
these transactions could harm our business, prospects, financial condition and results of operation. Further, to the extent that our efforts to prevent fraudulent
orders result in our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk the alienation of legitimate
customers.
If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties
that we offer for sale on our Website, or that we should pay commercial activity taxes, our business could be harmed.
We do not currently collect sales or other similar taxes for physical shipments of goods into states where we do not have a physical presence or "nexus".
One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us because we are engaged in online commerce, even
though we have no physical presence in those jurisdictions. The future location of our fulfillment centers and customer service center networks, or any other
operation of the company, establishing a physical presence in states where we are not now present, may result in additional sales and other tax obligations. We
challenged the constitutionality of a New York state law which requires Internet retailers to collect and remit New York sales taxes on their New York sales
who have no physical presence or "tax nexus" in New York, if the retailer uses the services of New York based Internet advertisers. The trial court dismissed
our challenge, and on appeal, the appellate court has partially affirmed the trial court. We continue to appeal those decisions. As a result of the enactment of
the New York law, we terminated our relationship with New York based advertising affiliates. Other states have passed similar Internet affiliate advertising
statutes, and in those states we have terminated our use of locally based Internet advertisers. Moreover, there are other states that currently have similar tax
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