Chaffetz swings and misses with Internet sales tax bill

Rep. Jason ChaffetzJason ChaffetzOvernight Finance: GOP makes its case for impeaching IRS chief | Clinton hits Trump over housing crash remarks | Ryan's big Puerto Rico win House Republicans press case for impeaching IRS commissioner GOP chairman: Time to remove IRS chief MORE, (R-Utah), is the latest to step up to the plate to solve the vexing question of how to apply sales taxes to purchases made online or by mail order. Like the failed Marketplace Fairness Act that preceded his new Remote Transactions Parity Act, Chaffetz has whiffed embarrassingly on this knuckleball of an issue.

Chaffetz's bill was introduced this week to much fanfare from state governments and big-box retailers, who seek additional tax revenue and competitive advantage, respectively. Proponents claim it solves many of the problems inherent in previous attempts. A close look at the text reveals it creates more issues than it resolves, while doing little to remedy the MFA's fatal flaw: empowering states to extend their tax-collection authority beyond their borders.

ADVERTISEMENT
The bill relies on a fundamentally unworkable standard of tax collection called "destination sourcing." In plain language, the term refers to requiring remote sellers to collect tax based not on the physical location of their business, the simple standard that governs all brick-and-mortar sales, but instead on the location of the buyer.

Storefront retailers simply assess their local sales tax to all sales made at the register, absolving them of the complex task of determining a buyer’s residence and applying the rules of as many as 10,000 taxing jurisdictions nationwide. They apply one code to all such sales and remit the proceeds to their local tax authority. Any disputes are resolved at the courthouse downtown rather than one across the country where they have no physical presence.

Under the RTPA, this simple standard would be denied to remote retailers. As a result, it would force them to quiz all their customers on their residence, parse the rules for that far-flung jurisdiction and remit the dollars to a tax authority in a state where they may have no presence at all. While RTPA supporters claim there are protections from audits by such states, the language of the bill includes a truck-sized loophole allowing any state to audit any seller if it thinks there is "misrepresentation."

The other "protections" in RTPA are also much less than meets the eye. It includes a "small seller" exception that eventually settles at $1 million, ostensibly protecting smaller businesses from facing the ravages of staggering sales-tax complexity. But in a bit of legislative sleight of hand, the threshold is calculated on gross receipts rather than on remote sales, as was the case in the previous MFA. That means that a small business with $1 million in total sales (which could be a one- or two-person operation) would be subject to RTPA’s onerous tax-collection requirements, even if only a tiny fraction of its sales were online.

Notably, the new bill also includes a provision that will ensnare all users of platforms like Amazon or eBay, even the proverbial grandma selling a few items of vintage clothing per year. It specifies that any use of such an "electronic marketplace," no matter the sales volume, will subject participants to the collection requirements of states where they have no presence at all.

This flies in the face of bedrock principles of federalism and sound tax policy. In attempting to remedy a perceived inequity, the Chaffetz bill would empower states to tax beyond their borders for remote retail sales, thus inviting them to demand the same authority to tax business or individual income outside their borders as well. The gradual elimination of state borders as limits to tax and regulatory authority portends a very dark future indeed for the Internet and interstate commerce more broadly.

If Chaffetz wanted to make solid contact, he’d have followed the lead of his colleague Rep. Bob GoodlatteBob GoodlatteHouse Republicans press case for impeaching IRS commissioner Saudis scramble for Washington allies IRS hearing: Five things to watch MORE (R-Va.). The chairman of the House Judiciary Committee has been floating his own proposal to apply the same common-sense "origin sourcing" principles in place for brick-and-mortar retail to remote sales as well, offering a truly level playing field while preserving geographical limits to state tax power.

If executed properly, this type of approach offers perhaps the only chance to address the Internet sales tax issue without unduly harming e-commerce or unwisely empowering state bureaucrats. But instead of listening to the advice of Goodlatte and virtually all conservative policy groups, it seems Chaffetz will strike out swinging.

Moylan is executive director of the R Street Institute, a nonprofit, nonpartisan think tank that promotes free markets and limited, effective government.

More in Economy & Budget

Congress can bring back fair competition with online sales tax legislation

Read more »