Retail Industry ATG - Chapter 3: Examination Techniques for Specific
Industries (Direct Sellers)
Direct selling provides important benefits to individuals who desire an opportunity to earn an income and build a
business of their own; to consumers who enjoy an alternative to shopping centers, department stores or the like;
and to the consumer products market. It offers an alternative to traditional employment for those who desire a
flexible income earning opportunity to supplement their household income, or whose responsibilities or
circumstances do not allow for regular part-time or full-time employment.

The cost for an individual to start an independent direct selling business is typically very low (which is a major
selling point for entering into this type of self-employment business).  Usually, a modestly priced sales kit is all that
is required for one to get started, and there is little or no required inventory or other cash commitments to begin.   
This stands in sharp contrast to franchise and other business investment opportunities that may require substantial
expenditures and expose the investor to a significant risk of loss.

Direct selling companies market their products through person to person contact away from a fixed retail location
through a network of independent sellers.  Frequently these sales presentations are in the home, in the form of a
sales “party,” or through door to door solicitations, or sometimes, as part of a get-together – one person to one
person.  In any case, these approaches are all considered direct sales. In addition, direct selling provides a
channel of distribution for companies with innovative or distinctive products not readily available in traditional retail
stores, or who cannot afford to compete with the enormous advertising and promotion costs associated with
gaining space on retail shelves.

This selling method should not be confused with terms such as direct marketing or distance selling which may be
described as an interactive system of marketing that uses one or more advertising media to affect a measurable
response and/or transaction at any location, with this activity being stored on a database.  Some commonly known
types of direct marketing and distance selling techniques are telemarketing, direct mail, and direct response.   
Direct selling is sharply contrasted to this type of sales as it concentrates on face to face or personal presentation
which is always an aspect of their selling relationship.

Types of Direct Selling Companies

There are two types of direct selling companies – single level marketing (SLM) or multilevel marketing (MLM).  
Single level marketing (SLM) companies reward direct sellers for their own personal sales activity.  SLM direct
sellers cannot take on other distributors or sales representatives. Income comes from commission or bonus on
sales.

In a multi-level marketing company, sales representatives are able to sponsor other distributors or sales
representatives and receive a commission or bonus on the sales made by their underlying resellers.  This
recruitment of down liners is necessary to increase a sales representative’s sales force and thus generate a
greater number of sales.  MLM’s are often referred to as network marketing companies.

Multi-level marketing differs from an activity called a “pyramid scheme.”  Pyramid schemes are illegal scams in
which large numbers of people at the bottom of the pyramid pay money to a few people at the top.  The success of
a pyramid scheme relies upon a never-ending supply of new participants.

Pyramid schemes seek to make money quickly.  Multi-level marketing companies seek to make money with their
representatives as the business grows by selling their consumer products.  Multi-level marketing companies have a
start-up fee that is small with a starting sales kit being sold at or below the company cost.  Multi-level marketing
depends upon sales to the consumer and establishing a market.

Demographics of Direct Sellers

Direct selling is a rapidly growing industry.  U.S. sales totaled $29.55 billion in 2003, up from $28.69 billion in 2002,
with more than 55 percent of the American public having purchased goods or services through direct selling.  
Direct selling globally has grown to more than $85.04 billion dollars as well.  For the 19th year in a row, this
industry has grown in both the area of sales and sales force.  The $29.55 billion dollar of sales is more than the
amount that was purchased through television shopping and on-line computer services combined.

Currently, there are an estimated 13.3 million people who are involved in direct selling in the United States and
more than 47.3 million people worldwide.  Most are women, though nearly a third are men or two-person teams
such as husband and wife (couples).  The vast majority is independent business people - they are micro-
entrepreneurs whose purpose is to sell the product and/or services of the company they voluntarily choose to
represent -- not employees of the company.  Of these 13.3 million people for 2003, approximately 90 percent of
them operate their businesses part-time. The Small Business/Self-Employed Division serves each and every one of
these 13.3 million direct sellers.  

Why are Americans so interested in becoming direct sellers?  Most are independent contractors; they have the
ability to work part-time or full-time and can choose when and how many hours they want to devote to their
business.  In other words, an individual can earn in proportion to their efforts.  The level of success is limited only
by their willingness to work hard.  And a person can own their own business with very little or no capital
investment.  

Since direct sellers do not need any specific amount of education, knowledge, or any specific requirement in order
to be successful, they only need the desire and self-motivation to grow their business and make it profitable for
them.

What Direct Sellers Do

Just about every consumer product or service can be purchased through direct selling.  But where is this direct
selling taking place?
Introduction
It is impossible to estimate the number of direct selling companies operating at any given moment.  This is a result
of several different factors.  First, most states do not require direct selling companies to register as such.  Second,
as with any business, many direct selling companies do not thrive in the direct selling market and have a relatively
short life span.

NAICS Codes and the Direct Selling Industry

The North American Industry Classification System (NAICS) has replaced the U.S. Standard Industrial Classification
(SIC) system.  NAICS groups the economy into 20 broad sectors, up from the 10 divisions of the SIC system.  The
Code 44-45 is specifically for the Retail Trade sector.

The NAICS definition emphasizes what the establishment does, rather than to whom it sells.  Retailers are defined
as those establishments that sell merchandise, generally without transformation, and attract customers using
methods such as advertising, point-of-sale location, and display of merchandise.  A store retailer has a selling
place open to the public; merchandise on display or available through sales clerks; facilities for making cash or
credit card transactions; and services provided to retail customers.

Taxpayers are instructed to enter on the Schedule C or Schedule C-EZ a code which best describes the type of
business activity that they participate in.  Currently, a 6-digit NAICS code is entered.

The instructions to Schedule C list several NAICS codes relating to nonstore retailers.  As discussed in this audit
technique guide, NAICS #454390 is probably the most appropriate code for direct selling businesses.

NAICS #454390 – Other Direct Selling Establishments (Including Door-to-Door Retailing, Frozen Food Plan
Providers, Party Plan Merchandisers, and Coffee-Break Service Providers)

These establishments are primarily engaged in retailing merchandise (except food for immediate consumption and
fuel) via direct sale to the customer by means such as in-house sales (i.e., party plan merchandising), truck or
wagon sales, and portable stalls (i.e., street vendors).

Examples:
Direct selling bottled water providers
Direct selling coffee-break service providers
Direct selling frozen food and freezer plan providers
Direct selling home delivery newspaper routes
Direct selling locker meat providers
Direct selling party plan merchandisers


Exhibit 1-1                   Industry Organizations

1. Direct Selling Association   www.dsa.org
2. World Federation of Direct Selling Associations   www.wfdsa.org
3. Direct Selling Education Foundation   www.dsef.org




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