Post originally appeared on the Avalara blog on July 30, 2015
Multi-level sales is big business — $178-billion-a-year big business — with more than 92 million independent consultants worldwide repping everything from clothing and jewelry to wellness, nutrition products and home décor. It can also be a risky venture, with higher-than-average failure rates and complicated tax compliance rules.
For starters, who is responsible for reporting sales tax? That depends. Some states require each independent consultant selling in that state to register to collect and remit sales tax. Others offer a tax collection agreement where the direct sales company can do this on behalf of their consultants. State rules vary on collection, reporting and remittance as well as on annual income, commissions and sales thresholds for compliance. Direct selling organizations must also obtain reseller permits and track exemption certificates for any wholesale transactions to their independent consultants.
Then there are tax rules around what you sell. Product taxability can get complicated quickly for direct sellers who sell into multiple states. Nutritional products, for example. Ten states and the District of Columbia exempt vitamins, food or nutritional supplements from sales tax. Others, like Illinois and Utah, tax them at a lower rate. Similar rule variations and exemptions apply to clothing and food as well. Direct sellers are also subject to use tax on the retail value of the free, incentive-based and promotional products used by or given to consultants, party hosts, and customers.
In some states, shipping and handling charges are considered part of the total selling price and are subject to the same tax rules as the items purchased. In Washington, for example, shipping and freight charges on retail sales to customers are subject to sales tax, while items sold and shipped to a wholesaler (the consultant) are exempted with a valid resale certificate.
Finally, where you sell comes into play as well. Nexus rules are changing as states continue to stretch the definition of what constitutes “physical presence” and now directly target common business practices associated with direct selling, such as participating in trade shows, a remote sales force, affiliate marketing and online selling. See how quickly this can get out of hand in our 3-minute whiteboard video, How Sales Tax Works for Direct Sellers.
Keeping track of the “who, what and where” of sales tax can be overwhelming for direct sellers who are simply trying to grow their business. Software that manages sales tax in your accounting and billings systems is an affordable and efficient option to remove any uncertainty, ensuring the right rates and rules are applied to transactions, the proper tax owed is reported and remitted to the states, and returns are filed correctly and on time.