Auren Hoffman on the Internet "Black Hat" Tax

My friend Auren Hoffman has an interesting post on the “Black Hat” Tax on consumer Internet businesses, basically pegging the cost of dealing with all aspects of fraud, scams, phising, and related government legal requests,… to 25% of revenues. He then goes on to mention a couple of examples:

A great example is PayPal. The book PayPal Wars details an intense battle the engineering team and even the CEO fought against fraud. This was one of the consuming issues of the company. Now PayPal is a financial institution, so you would expect lots of fraud. But dating?

After surveying most of the dating sites, I have found that one of their top three issues is fraud. A frequent scam is to contact an unsuspecting middle-age man from a profile of a good looking woman saying "my husband is beating me here in Moscow, please send $2000 so I can buy a plane ticket and escape." The unsuspecting chap sends the money only to never hear from the person again. Apparently there are scam factories in the Philippines and other places that have thousands of people, paid on 50% commission, working to scam unsuspecting dupes in this way. And one success a month is $1000/mo which compares well to many countries where the avg salary might only be $200/mo.

Troubling, and unfortunately, the statement that it is only going to get worse is very credible. Just check this piece in this morning’s New York Times: Technology and Easy Credit Give Identity Thieves an Edge.

Comments

[Ben]

Ever since I first saw Auren's post, the term tax bothered me. I know Auren's views are not pro tax, but this is not really a tax. It is a cost of doing business, and overhead that the goverment could probably help address but never in a way as innovative at what they have done at Paypal, or the anti spam companies, or for that matter what Auren is doing with Rapleaf. This is not a tax is a cost of doing business that people in the free markets like Auren will drive lower and lower over time.

The FBI certainly can't spend time on it, they are too busy creating constitutional issues by searching congressipnal offices

[Jeff Clavier]

Ben> You have a point, but the reason why I buy the notion of tax is that this is a cost which is not under your control, that you can't increase or decrease like you can do with COGS.