Texas judge blocks unconstitutional Corporate Transparency Act that would have required all small businesses to hand over private ownership and financial details to the government

A Texas federal judge has issued a preliminary block on the Corporate Transparency Act, which would require all American businesses to report information about their stakeholders to the Treasury Department, invalidating it within less than a month of its reporting deadline.

The nationwide injunction was issued by U.S. District Judge Amos Mazzant in Sherman, Texas, siding with the 300,000-member National Federation of Independent Businesses and a group of non-profits and small businesses who claim the act is unconstitutional. Some of the other plaintiffs involved include the family-run firearms and tactical gear store Texas Top Cop Shop and the Libertarian Party of Mississippi.

Mazzant said the federal government was making an “unprecedented” attempt to legislate in an aspect of law that is typically left up to states and taking away the anonymity that states offer for forming corporations. He based his decision on the ruling that Congress does not have the authority to regulate commerce in this way and that it was violating states’ rights under the Tenth Amendment.

The judge wrote in his 79-page opinion: “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government. If sanctioned, there’s no telling how Congress might control companies in the future.”

The Act would have seen owners and other key figures from 32 million businesses forced to provide their personal information to the Treasury Department’s Financial Crimes Enforcement Network by the end of the year.

Mazzant noted: “The fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects — especially though the CTA, which does not facially regulate commerce.”

Congress claims the goal of the act is to help law enforcement find shell companies that are used for crimes such as financing terrorism and money laundering. They maintain that the reporting will enable them to better detect when someone is trying to hide their identity or money obtained illegally with opaque corporate structures. However, groups like the American Farm Bureau Federation claim the law is an overreach of federal authority and infringes on their civil liberties.

Texas Farm Bureau Director of Government Affairs Regan Beck applauded the ruling, saying: “This is a major win for farmers, ranchers and small businesses.”

Alabama federal judge made similar ruling earlier this year

This isn’t the first time that the law has been deemed unconstitutional; a federal judge in Alabama made a similar decision earlier this year in a separate challenge. However, in that case, the judge issued an injunction that only blocked its enforcement when it came to the parties that brought the case to him, one of which was the National Small Business Association.

The 2021 law has been facing scrutiny from consumer groups for several years, but these concerns gained steam in recent months as the deadline for all businesses registered or created prior to January 1, 2024, to file their initial report draws closer. FinCEN said it expected more than 32 million reports to be filed this year, which is the first year it was in effect.

The information that businesses must report about their owners includes their names, addresses, dates of birth and scanned images of driver’s licenses or passports. Only 20 percent of companies that fall under the act’s purview have filed reports so far, and those who fail to comply face fines and criminal penalties.

Sources for this article include:

Reuters.com

News.BloombergTax.com

Forbes.com