Blog : The Internet Sales Tax

by Ed Zwirn on May 8th, 2013

Penny stock investors take note: A revenue measure passed by the U.S. Senate this week could generate headaches for small- and medium-sized businesses.

The so-called Marketplace Fairness Act would generate revenue for the government while leveling the playing field between traditional "brick and mortar" retailers and the growing number of penny stocks and other businesses that operate either online or via mail order or telephone. Businesses with at least $1 million of "remote" sales revenues would be required to collect sales taxes if they deliver their products to locations with sales taxes.

Although passage of the bill is anything but certain in the Republican-controlled House of Representatives, detractors are already complaining that it would not only cut into the revenues of Internet-based businesses, but create a compliance burden for companies with limited accounting capabilities (and this would include many penny stocks) as they struggle to comply with tax requirements in the approximately 9,600 different city, state and municipal tax jurisdictions in the U.S.

The bill would, in short, change the rules of the game for penny stocks and other companies that have heretofore been protected from taxation under a 1992 Supreme Court decision. If it passes muster in the tax-averse House, the threshold for taxation will if anything be higher than the $1 million proposed by the Senate.

If this measure were to become law, it would presumably be good news for Real Estate Investment Trusts and other entities designed to capture profit from malls and other traditional retail locations. It would also help these "brick-and-mortar" businesses by eliminating one incentive for purchasing online. Of course, it still will cost money to drive to these businesses.

The upshot for penny stock investors is that a revenue-hungry U.S. government will over the long haul be likely to pass some kind of measure targeting the rapidly growing amount of money being made over the Internet. This is something to keep on your radar, especially if your penny stock's business plan receives a substantial portion of its revenues via the Internet.

On the other hand, business experts agree, the question of how to tax these revenues is not going away any time soon, meaning that passage of a law settling this issue might actually do good by alleviating some of the uncertainty posed by the unsettled taxing and spending situation in the U.S. It is this uncertainty, whether generated by spending sequester  or tax controversy, that can hit penny stocks and other small businesses where it hurts.