Our law office is often asked what the role taxes play in the direct selling, network marketing, MLM industry. There are usually two tax subcategories that seem to impact our industry the most. The first is independent contractor status and withholding. The second is sales and use tax collection by MLM companies. Until 1982, there was a real issue as to whether or not the IRS and government would recognize the independent contractor status of direct sellers or if companies were required to withhold a portion of their income, as if they were W2 employees. After long-time disagreements, and at the industry’s request, in 1982, Congress amended the Internal Revenue Code in an Act entitled “The Tax Equity Fairness Responsibility Act” (TEFRA). TEFRA specifically recognized the independent contractor status of direct sellers which saved direct selling companies from huge bureaucratic administrative costs. Companies could now issue 1099’s to their distributors rather than have to engage in an elaborate W-2-type withholding process. This legislation was very important for our industry. Many states were soon to follow.
The second tax category that has impacted our industry is the sales and use tax. State governments – all governments – of course are in dire need of more revenue and have sought to increase taxing. Companies that market strictly on the internet, on TV and across state lines are shielded from having to collect sales and use taxes because of the Commerce Clause of the U.S. Constitution, which prohibits states from placing a restriction on the flow of interstate commerce unless there is some type of a nexus or connection in state. It has long been a consensus in our industry that, by having distributors in a state, by having them recruit, drive customer traffic to websites, recruit and conduct training, and promote sales, that direct selling companies do have a nexus in the states where they have distributors. Therefore, almost all leading direct selling companies register to collect sales and use tax in states and they do so on behalf of their distributors, because if they don’t then they are concerned that they will be held legal liable.
In addition, as a practical reason for collecting and remitting sales and use tax, companies realize that if they ask their distributors to be responsible for their own sales and use tax collection and filings, companies are then merely creating another obstacle for distributors who should instead spend their precious time getting out there to promote, recruit and sell. Virtually every direct selling company, including the ones that market on the internet, collect, and remit sales and use taxes. There are potentially thousands of state and local taxing authorities…..at a minimum, companies comply with sales and use tax laws at the state level. Larger companies than can afford the administrative costs also track and file at the local levels.
Additional information about taxes is available by clicking the links below:
Why do I have to pay sales tax? Article
Taxes and the Network Marketer Article
MLM and Sales Taxes Article
Internal Revenue Service (IRS) Advises Direct Sellers Webpage
What are the Central Tax Issues for MLM? Companion Video to this Blog Post
The Tax Guide for MLM/Direct Selling Distributors Book
As always, be sure to visit www.mlmlegal.com and www.mlmattorney.com for information and updates on the MLM industry.
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