Launching a new Direct Selling Company (home party or MLM) and getting it off the ground can be a very complex and difficult process. Especially if you’re doing it on your own. Unlike many things, the world of Direct Sales is not something that you can just YouTube and find easy-to-follow tutorials on how to effectively build and grow a Direct Selling Company. There are many areas that must be considered, such as building your compensation plan (and keeping it legal), training your field, compliance, legal, your sales pitch, how to motivate your sales force, recruiting, retention, logistics, what software are you going to use, how do you keep a balanced budget, communication with your field, customer service, social marketing, and the list goes on and on. The best practices for each of these disciplines is truly unique for the world of direct selling. Much of what drives the peculiarities is the fact that your products will be demonstrated and sold by an army of independent field sales reps – who will make a decision each day whether or not to work their business and stay with your company.
Because of these complexities, only 20% of all direct selling startups are in business after one year. The other 80% have failed in their attempt to launch. However, what we have found is that if the entrepreneurs will take the time early to learn and follow proven best practices and processes for starting and running a direct selling company – that success rate is as high as 80% still in business and growing after one year.
We want more successes and less failures! We’re sure you do to! Failures are bad for the industry and leave thousands of independent sales reps’ dreams laying in the wake. Successes breed confidence and good will in the direct selling industry and help independent sales reps reach their dreams and aspirations. To increase success rates – YOUR success, we have brought together in one place, at one event, the industry’s leading experts in these different fields to educate you on Best Practices of Starting, Building, and Growing your Direct Selling Business.
The Direct Selling Symposium is a place of education, learning, and mentoring – and includes front-of-the-room instruction as well as individual coaching sessions. It is NOT a time when services are sold – in fact it is prohibited. Whether you’re an entrepreneur starting from scratch or leveraging your existing business by diversifying into the direct selling space – attending the Direct Selling Symposium will shave years off your learning curve, and dramatically increase the likelihood of success. We look forward to seeing you there!
Sales tax compliance should be a priority for direct selling businesses. Small compliance errors can lead to big problems if they aren’t quickly found, exposing sellers to risk. The point of direct selling ventures is, after all, to sell. However, the more you sell, the more likely you are to run afoul of some obscure sales tax law as you expand your product catalog and sell into new markets. If state tax agencies find you out of compliance, your business could face significant penalties and interest on delinquent taxes.
So how can you rapidly grow your business without rapidly increasing your risk of exposure during a sales tax audit?
Here are four tips for doing exactly that.
Be vigilant: stay compliant where you sell now.
This may sound easier than it is. Sales tax laws change: something that is exempt in February 2014 (like storage services in Minnesota) could be slated to become taxable in April 2014 and then, at the final hour, be made exempt again. In addition, product taxability rules can be incredibly complex: wheat germ is exempt in California unless it is labeled as a food supplement or the equivalent of a food supplement, in which case it is taxable. And sometimes the order of ingredients on the label is what differentiates a taxable product from an exempt product; it is the first ingredient that distinguishes taxable confections from exempt grocery staples in Maine.
Make sure you audit your current sales tax liability, so that you have a solid foundation of compliance from which to grow.
Be flexible: be ready to charge tax wherever you go.
Direct sellers need to be like professional athletes—poised and ready to take any opportunity that presents itself. That requires flexibility. How soon could you be ready to take advantage of sudden sales opportunities in California or Florida? Sooner than you think, if you have a sales tax management system that will quickly and efficiently apply the proper tax rate to each product in each new jurisdiction.
Be efficient: put your energy where it is needed.
Direct sellers must be able to focus time and energy on keeping current clients happy, expanding into new markets, and/or developing new products. Manual sales tax compliance is a tedious, time-sucking activity. Don’t let it sap the zing from you or your company: embrace a sales tax management solution that automates key compliance tasks, so you can spend time focusing on growth.
Be smart: choose a system for sales tax compliance that will grow with you.
The last thing direct sellers need to worry about is sales and use tax, and yet that is one of the first things auditors will examine when they come knocking. You don’t need to be afraid to open the door. You just need to implement a sales tax management system solution that can scale with you as you grow, easily adding new products, markets, and greater transaction volumes into your compliance process.
In The Importance of Being Earnest, Oscar Wilde wrote, “One must be serious about something, if one wants to have any amusement in life.” Follow his lead, and take sales tax compliance seriously. Implement automated sales tax software as a service today. Learn more at AVALARA.
The following is part 8 in our 10-part series entitled “10 Steps Towards Launch!” by Terrel Transtrum, President/Founder of ServiceQuest. If you are thinking about starting a new direct selling company, contact us today!
The eighth of ten business segments that should compete for your attention is MLM LEGAL. The world of MLM Law is always evolving, but never dull. The best MLM attorneys will guide you through the critical issues as outlined below.
- Legal Review of Compensation Plan, Literature and Publications
- Design an MLM Distributor / Home Party Consultant Agreement
- Create the Home Party / MLM Distributor Policies and Procedures
- Determine the Proper Sales Tax Processes and Policies for Your Company
- Protect Your MLM Company’s Intellectual Property
- Set up the MLM Compliance Training and MLM Compliance Administration Systems
- File the MLM State Registrations
- Select the Entity that is Right for Your New MLM Business
- Develop an MLM Library of Essential Forms and Documents
- Gather an Effective MLM Legal Team That You Feel Good working With
Here are examples of descriptions that you might write for your MLM Launch Best Practice:
- Distributor / Consultant Agreement – We have a distributor / consultant agreement (online and/or paper) containing the most recent terms and provisions for complying with state and federal laws and regulations, produced or reviewed and approved by a licensed legal professional.
- Compliance – Our compliance system is set up to include online training and certification of new distributors / consultants, compliance research system, compliance administration system, and staff training for handling policy questions.
MLM Legal is an important part of the launch puzzle. With the right planning and recommendations, you will save a great deal of time, money, and worry as you select and work with the best MLM Lawyers.
For more information, contact Terrel Transtrum email@example.com
Legitimate MLM and Party Plan companies are generally welcome businesses in the United States and throughout the world. State and federal agencies continue adopting legislation for network marketing companies, establishing standards for companies to follow, differentiating them from illegal pyramids. Staying MLM legal is the only way to do business.
Because network marketing and direct selling companies offer such potent rewards and incentives for those volunteer sales representatives and distributors who help their companies grow, both the great and the awful are drawn to direct selling. While the great contribute to this very legitimate profession, the awful steal from the magnificent opportunities through abusive, fraudulent and illegal pyramids and scams. Since fraud, deception and loophole seeking are the tools of thieves, regulations are regularly evolving and changing in an ongoing attempt to protect and encourage the legitimate MLM business models while slamming doors on the scamsters.
So what is a startup MLM or Party Plan company to do? In simple terms, learn about the basic MLM legal issues and participate in creating a legitimate business that will last for years.
The following checklist of MLM legal issues will help you to begin to identify where you are knowledgeable and confident, and where you can use some brushing up as you prepare for launch:
- Is our compensation plan MLM legal in all 50 states?
- Is our company registered in the states that require timely registration?
- Do we have the proper business entity set up that meets our needs?
- Do we have the right sales tax strategies in place in order to remain MLM legal?
- Are the policies & procedures properly drafted?
- Do our policies & procedures comply with the most stringent states so that they are effective and enforceable in all states?
- Is our electronic enrollment and ordering system in line with e-commerce laws?
- Are our products properly labeled and represented?
- Does our literature comply with legal requirements?
- Do we have a good training system that supports distributors in fulfilling their roles and responsibilities?
- Are our customer service reps trained in responding to policy questions and staying MLM legal?
- Do we comply with the hiring and labor laws?
Business risks abound, and there are no exceptions in network marketing and party plan models. Considering the scope of MLM law, a person could literally worry herself or himself to death or at least become fully consumed were they to attempt to identify all the risks. In order to provide some peace of mind as well as a checklist of legal risks in MLM, Party Plan and Network Marketing, consider some of the risks that are summarized below from the world of MLM law, and look for opportunities to discuss with your legal advisor:
- Illegal compensation plan
- Policies & procedures that do not comply with state or federal requirements
- Exposure for earnings claims or inflated earnings representations
- Insufficient liability protection including proper insurances
- Policies and procedures that remove control from the company
- Treatment of distributors as employees rather than independent contractors
- Lack of protection regarding the National “Do Not Call” Registry
- Products that have no “real-world” marketplace
- Products that are sold at inflated prices
- Product misrepresentations or illegal product claims and how MLM law defines the rules
- Fees paid solely for recruitment instead of sale of product
- Large inventories of unsold product held by distributors
- Mandatory purchases of products or services
- Requiring substantial investment
- Inventory “loading” or “bank” qualification and how MLM law regulates
Every direct selling company, whether they consider themselves MLM, network marketing, consumer-direct marketing, Party Plan, or multilevel marketing, must be aware of its obligations regarding sales tax. MLM sales tax and Internet transaction taxes, Value-Added Taxes (VAT) are increasingly hot topics. According to LaunchSmart™ affiliate James Richmond, the premier sales tax authority for the direct-selling profession, the following information will help to shorten your learning curve:
- Network marketing sales tax issues are here to stay. Presently 45 states and the District of Columbia impose a sales tax.
- Only the states of Alaska, Delaware, Montana, New Hampshire and Oregon do not currently impose a sales tax. However, various local jurisdictions in Alaska do impose a sales tax.
- More than 7,400 local jurisdictions (cities, counties, parishes, etc.) impose a sales tax. MLM sales tax is a growing concern.
- Only the states of Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Rhode Island and West Virginia do not currently allow local jurisdictions to impose a sales tax.
- Of the 7,400 local jurisdictions, 7,100 are administered by their respective state.
- The 300 local jurisdictions not administered by their respective states are in Alabama, Alaska, Arizona, Colorado, Idaho and Louisiana.
- There are, therefore, 300 local jurisdictions that a company must have a separate agreement and register with if it desires to collect all of the sales taxes in the United States.
- Exemptions vary from state to state. Currently there is no uniform definition of exempt products, services or entities among the states. Food products are not taxable in 24 states and the District of Columbia.
- Food products are subject to sales tax at a reduced rate in 12 states.
- Vitamins, food supplements and nutritional supplements are subject to a reduced rate in the states of Illinois and Utah.
- Dietary supplements are subject to a reduced rate in the state of West Virginia.
- The responsibility for the collection of sales taxes falls on the retailer.
- The definition of “retailer” varies significantly between states and jurisdictions
- The sates of Kansas, Michigan, Missouri, Texas, Washington, Wisconsin and Wyoming require all direct selling, multilevel, MLM, Party Plan and network marketing companies to register, collect, and remit sales taxes and will not knowingly allow the independent sellers to register, collect and remit. These states are aggressively seeking companies not in compliance.
- Effective August 1, 2005, the state of Kentucky broadened its sales tax nexus standard to include remote sellers who use in-state affiliates to facilitate remote sales. Whether they will attempt to include direct selling, multilevel, MLM, Party Plan and network marketing companies under this standard is not yet known.
- The remaining states and local jurisdictions have statutory authority to require any company to collect their sales tax, even if that company is not a retailer, if the state or local jurisdiction deems it necessary for the protection and efficient administration of the revenue due. Given the current financial conditions of the states and local jurisdictions, it is anticipated that many will become very aggressive and seek to impose this provision.
- The states of Alabama, California, Connecticut, Georgia, Illinois, Indiana, Minnesota, Missouri, New Jersey, New York, North Carolina, South Dakota, Virginia and Wisconsin have “public contracting nexus laws.”
- While states and local jurisdictions have a vast arsenal to exercise control over a company for the collection of sales taxes, companies may rely on Public Law 86-272 (federal constitutional law), which sets forth when a state or local jurisdiction can exercise jurisdiction over the company, thus requiring it to collect sales tax. In addition, the company may rely on two constitutional doctrines: the Due Process Clause and the Commerce Clause
- The Streamlined Sales Tax Project is an effort created by state governments, with input from local governments and the private sector, to simplify and modernize sales and use tax collection and administration. There is no specific provision in the project for direct selling, multilevel, MLM, Party Plan or network marketing companies; however, it will simplify the administration of sales taxes for these companies.
- The Internet Tax Freedom Act which places a moratorium on state and local taxes on Internet access and multiple or discriminatory taxes on E-Commerce Internet access was enacted in October 1998. The Act expired on October 21, 2001, and was extended until November 21, 2003 and was extended again until November 1, 2007. On October 31, 2007, President Bush signed the Internet Tax Freedom Act Amendments Act of 2007 which extended the moratorium until November 1, 2014. This new Act also broadened the tax ban to include forms of online communication beyond simple Web access. These changes will protect instant messaging and e-mail, including voice and video messaging services as well as personal storage and other video services regardless of who provides them. It does not prohibit a state or local government from taxing purchases made via the Internet nor does it protect a seller from collecting sales taxes on its sales if it has a legal responsibility to do so.
- Companies that retail products directly to the general public or as a convenience to the retail customers of their independent sellers, in addition to selling at wholesale to their independent sellers, will find it more difficult to defend themselves from the responsibility of collecting sales taxes than a company that is only wholesaling.
- Companies that do not collect all the sales taxes still have a legal responsibility to ensure that its sellers are in compliance and must obtain a resale certificate from each of its sellers. These must be maintained by the company and renewed periodically.
- While a company may determine that it does not have a legal responsibility to collect all sales taxes that are imposed, it may have a moral and ethical responsibility to do so.
- A company may voluntarily elect to administer sales taxes. It is important to have a formal written agreement with the various state and local jurisdictions. Do not register without having a formal written agreement.
- Companies that elect to administer all the sales taxes will incur some additional costs, including personnel, software and compliance.
- There are many benefits that a company can derive if it elects to administer all the sales taxes. These include, but are not limited to, conformance with the Sarbanes-Oxley Act; controlling and ensuring compliance with the various sales tax laws; reducing the compliance burden and associated costs on its sellers; time value of money; vendor compensation; and creating a culture of partnership between the company, its sales force, and state and local taxing jurisdictions.
Your company’s credibility depends on your knowledge and compliance with the law, your commitment to your sales force and customers and your awareness of legal and regulatory trends affecting the profession of direct selling.
Companies that do not seriously address the administration of sales tax but who ignore the issue altogether may discover, albeit too late, that they face significant liability for failure to comply. Because the laws change so frequently, this information can only be viewed as a guide. It does not constitute tax, legal or other advice from LaunchSmart™ or its principals or affiliates, all of which individually and collectively assume no responsibility with respect to assessing or advising the reader as to tax, legal or other consequences arising from the reader’s particular situation.
This information is only periodically updated at this website, so be sure to check with your tax advisor for the most recent releases.