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© Jeffrey Babener, 2013
MLM Sales On The Internet Continued
By Jeffrey Babener, © 2013
Both MLM distributors and MLM companies are always asking: Can states legally tax interstate sales? Who is
responsible for sales tax? When should it be collected? How should it be collected? These questions are
constantly put to MLM companies and their distributors.
They Call It "Nexus."
The right of a state to collect sales tax on interstate sales is restricted by the commerce clause in the United States
Constitution, which prohibits states from unreasonably interfering with interstate commerce. The U.S. Supreme
Court has held that states cannot impose sales tax on companies whose sole business is a mail order business.
MLM companies are in a different category than mail order firms, however. Multilevel marketing does involve
interstate sales of products, but it also involves one on one personal contact with customers and substantial activity
within most states. MLM distributors or sales representatives are basically independent, commissioned local sales
people who: (1) sell the product directly in the state; (2) procure sales orders for the company; (3) promote product
within the state; (4) recruit other participants in the state to join the MLM program. Therefore, MLM companies
have sufficient activity to trigger a legal term called "nexus," i.e. "legal presence" for sales tax purposes.
Because of this activity, say state tax officials, MLM companies, unlike mail order companies, are probably liable for
state sales and use taxes. In a famous case decided by the Supreme Court in 1960, the court held liable a national
company for sales of independent distributors in Florida.
Companies that do not seriously address the question of sales tax, may find themselves liable for some significant
penalties. In the event the company does not collect the tax, and the distributor does not collect and remit the tax,
the company may find itself liable for the entire amount, plus interest, plus additional stiff penalties. Companies
which ignore the sales tax issue altogether are clearly headed for trouble. And it's not just tax on products, but
equally applicable is sales tax on sales aids.
So - What To Do?
Prudent MLM companies follow one of two approaches when it comes to collection of sales tax. Companies collect
the sales tax based on the suggested retail price at the time of the sale of product to distributors. Companies are
likely justified in collecting sales tax on the wholesale price on that product which is actually personally consumed
by distributors. The company then remits the sales tax to the locality. This approach has some distinct
advantages. First, the company removes the administrative burden from its distributors who are complying with
local sales tax regulations. Second, the company probably develops a better relationship with the state or locality
because it has taken on the responsibility of seeing that taxes are paid. For those companies that can afford it,
there are computer services which provide detailed sales tax information on the thousands of taxing localities.
Some companies, on the other hand, are either not equipped to collect and remit sales tax, or they do not want to
be in the business of collecting and remitting sales taxes. These companies require distributors to obtain and
furnish the company with a state sales tax I.D. number and to collect and remit the tax themselves for resales or
personal use. The companies that follow this approach should be very careful to verify that their distributors have
obtained state sales tax I.D. numbers, and that their distributors are remitting appropriate sales taxes.
It's Tough Out There.
No question - this area is a big headache, not just for traditional MLM, but also for internet MLM. Also, no question
- this quagmire is best navigated by qualified lawyers and accountants. If you are a distributor, have patience with
your company. If you are a company, have patience.
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