Chaffetz’s Internet sales tax bill is worse than prior attempts

The fatally-flawed Marketplace Fairness Act was shelved last year because of the cost, complexity and threat of government audit it imposed on small business.

Last week, in swooped Rep. Jason Chaffetz (R-Utah), to try to fix MFA with his Remote Transactions Parity Act.  But in a strange twist, Chaffetz has actually made a bad bill much, much worse.

{mosads}In a cynical attempt to win support from the states, Chaffetz has jettisoned two central features of  MFA – federal preemption and federal court jurisdiction.  In doing so, the Chaffetz bill takes a bill that was already unworkable because of the significant costs, administrative burdens, and audit risk it imposes on small businesses, and increases those concerns by orders of magnitude.  It has become Frankenstein legislation that only lobbyists and tax lawyers could love.   For small business owners, especially those who sell through mail-order catalogs, the legislation makes the situation more complex.

By eliminating federal preemption and giving jurisdiction to state courts, the Chaffetz approach is  more troubling and will lead to endless confusion and litigation.

No question, there are major problems with the approach of MFA and its ilk.  MFA imposes huge implementation costs on small and medium sized business, introduces an incredible degree of complexity, and creates the risk of government audit from 46 states and intrusive reporting requirements from the more than 10,000 local tax jurisdictions across the nation.

The decision by Chaffetz to remove the federal preemption provisions and to give state courts jurisdiction turns the already tenuous logic of MFA on its head. 

Not only does it impose huge costs and complexity on small businesses that have to implement software solutions. But now it creates a crazy quilt of laws that businesses would have to comply with.  It promises unending complexity and pain for businesses that would have to keep up with competing state laws that will surely have different reporting requirements and definitions for taxable goods.  This makes no sense.

And just as important, removing federal court jurisdictions eliminates a critical backstop when legal questions arise, as they inevitably will.

But the Chaffetz bill now says that businesses can’t go in the federal courts, which provide a degree of consistency when it comes to case law, and instead forces businesses to go the state courts, which are far more volatile and uneven. 

So a retailer is subject not only to audit potential from 46 different states, but may be subject to litigation in each of those states

Not only is this bad policy, but it creates the huge threat of forum shopping and gaming the system.

This makes no sense.  We should be looking for ways to lower costs for implementation and decrease complexity.

The only bright spot in this otherwise dark cloud is that House Judiciary Committee Chairman Bob Goodlatte (R-Va.) is working on an alternative approach that would provide a real and lasting fix.  Rather than focusing on where the purchaser is located, it relies on where the company operates.  This would simplify tax collection enormously, and prevent the complexity and chaos that Chaffetz encourages.

From a legal and compliance perspective, the Chaffetz bill represents the worst of all worlds.  It creates more complexity in collecting Internet sales tax, but doesn’t provide businesses with uniform standards to rely upon. 

It is a recipe for disaster that will lead to endless streams of litigation in state courts across the nation.

Alpert is founder and CEO of Uno Alla Volta, a seller of handcrafted artisan products, headquartered in North Branford, Connecticut.