Internet Sales Exploding
although the typical internet marketer is immune from sales tax
collection in the same fashion as mail order sellers, the same will
probably not hold true for the MLM company that markets
over the internet.
Sales of MLM products on the internet are exploding. The reasons
are many. First, internet technology has enabled virtually all leading
MLM/network marketing companies to take orders over the internet rather
than by call centers. For many companies, internet ordering dominates
the ordering process and makes the buying experience much more convenient
for distributors and customers. Second, leading MLM companies provide
replicating web templates for distributors to drive customers to the ordering
section of web sites. Third, in addition to existing MLM companies
that allow for alternative ordering via the internet, many new MLM companies
have appeared whose sole method of marketing is through the internet,
often offering web shopping malls. Will this paradigm change in
ordering relieve MLM companies from obligations for sales tax collection
in that the ordering process makes them more like a catalog mail order
firm? Unfortunately, although the typical internet marketer is immune
from sales tax collection in the same fashion as mail order sellers, the
same will probably not hold true for the MLM company that markets over
the internet by utilizing networks of thousands of distributors in every
state to drive customers to their internet sites.
for MLM Internet Malls
MLM distributors often express frustration that MLM companies collect
sales and use tax on product purchases. Because there is no "in
store sale," networkers often think that they are immune just like
mail order catalog and internet sellers.
Well, unfortunately the activity of distributors in each state deprives
networkers of the immunity from sales and use tax. In fact, at a
recent industry meeting, James Richmond, Chief Administrator, Sales and
Use Tax, for Amway, noted that Amway has collected and remitted such tax
since 1971 and believes it has a moral and legal obligation to do so.
To the surprise of many, Richmond indicated that, since Quixtar, Amway's
internet spinoff, is part of the Amway family of companies, it has a legal
obligation to collect tax on internet sales as well. This is a wake-up
call for all the MLM internet virtual malls sprouting on the web.
Blame the Pharaohs.
Sales and use taxes are a source of great revenue for states and great
headaches for MLM and direct selling companies. Sales taxes are
collected in the vast majority of states and tens of thousands of local
cities and counties have similar taxes.
Commerce Clearing House, the publisher of many tax publications, reports
that in Egypt the pharaohs placed a general tax on the sale of all commodities
at the rate of 5% of sale price. The Romans obviously thought this
was a good idea and, after their conquest of Egypt, the rate rose to 10%.
For the next 2,000 years, to this day, bureaucrats have found sales tax
a favorite revenue raiser.
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
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
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
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,