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What Will a Chaffetz Speakership Mean for Internet Freedom?

With House Majority Leader Kevin McCarthy’s (R-Calif.) gaffe regarding the Benghazi investigation, the race to replace outgoing Speaker John Boehner (R-Ohio) appears much more open. Days later, Utah Republican Jason Chaffetz seized the opportunity to announce his own bid for the Speaker’s gavel. The second-term congressman considers himself one of the more tech-savvy members of Congress, but how might a Chaffetz Speakership affect Internet freedom?

Rep. Chaffetz claims to be a strong defender of the Tenth Amendment’s constitutional guarantee that powers not delegated to federal government are reserved for the states and to the people. Yet, last June, he introduced the Remote Transactions Parity Act of 2015 (RTPA, H.R. 2275), which would allow states to reach across their borders to tax online purchases by other states’ residents.

Currently, a sales tax is only applied to online purchases when the seller has a physical presence in the state where the buyer resides. For example, when a customer in Virginia buys something from a retailer in California, the purchase is only subject to tax if the company has a store or warehouse in Virginia.

Far from being an arbitrary tax loophole, this physical presence standard is the principle of, “no taxation without representation” in action. The business, not the buyer, calculates, collects, and remits the tax to its own state’s authorities. Chaffetz’s bill removes this physical presence standard and allows states to tax businesses located wholly outside their borders.

Breaking a cornerstone rule of fairness in taxation—that those being taxed should have a political voice over those taxing them—is bad enough, but it has additional serious consequences.    

As the legal taxpayer, the seller is also the party subject to being audited. Allowing state tax authorities to reach beyond their borders can expose businesses to being audited by every state where they have made a sale—that’s 45 potential audits from each 45 state collecting sales tax. This burden in compliance costs led to objections that helped stall the RTPA’s successor, the Marketplace Fairness Act, in the House, but Chaffetz’s attempt to fix this problem in the RTPA proves equally troubling. 

The RTPA touts protection from state audits for smaller businesses that have no physical presence in a state and under $5 million in gross receipts. But a loophole in the bill gives states the authority to trigger audits despite this supposed protection. There’s little doubt that notoriously aggressive tax collecting states, like California and New York, will make frequent use of the allowance, rendering the safeguard impotent.  The RTPA also requires businesses to use state-employed tax compliance agents, which is tantamount to having an IRS agent prepare your taxes.  

Another worrisome aspect of the legislation is its rolling small-seller exemption. The first year it exempts businesses with less than $10 million in gross receipts for combined remote and in-state sales the previous year. The second year the threshold drops to $5 million and in third and subsequent years it shrivels down to $1 million. This raises the question: If this tax scheme doesn’t impose an unreasonable burden on businesses, why the need for an exemption at all? 

There’s more. The RTPA’s model of destination-based taxation reduces healthy tax competition.  Why would state officials make tough spending cuts and compete for businesses to locate in their state by lowering the tax burden when they can simply tax other states’ businesses? Lessening the downward pressure on tax authorities to tax rates low leads to less money in taxpayer’s pockets. 

Other RTPA supporters include big box stores and Amazon. They’re savvy enough to know that the bill’s compliance costs will force many of their competitors out of business or, in Amazon’s case, force small sellers onto the Internet giant’s platform, where they can be charged a tidy sum for tax software services rendered. 

Chaffetz himself said: “A broad coalition of large and small businesses, online and brick-and-mortar retailers, and state and local government leaders asked Congress to modernize our nation’s outdated sales tax collection framework.” The astute reader will note there’s no mention of taxpayers or consumers in there.

Chaffetz recently said, of his bid for speaker, that he wants, “a speaker who speaks.”  But will the Internet like what he says?


Check out Part 2 by CEI's Michelle Minton: What Will a Chaffetz Speakership Mean for Internet Freedom? Part 2