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.