Most businesses register for sales tax collection authority, collect sales taxes, and remit the collected taxes but only in the states where the business has a physical presence (a store, an office, or a warehouse).

Sales taxes must be paid on taxable transactions except in those states with no sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon). In Alaska, however, some local jurisdictions assess sales tax.

While at one time direct selling companies collected sales tax only on shipments to addresses in their state, today this isn't sufficient.

Here's why...

The vast majority of representatives of home party plan and network marketing companies operate their businesses as part-time ventures. As a result, state and local sales tax authorities tend to view the businesses of independent representatives differently from traditional businesses.

While operating their own businesses, independent representatives of direct selling companies expect not to have to deal with sales tax registration requirements.

Taxing agencies strongly prefer that direct selling companies themselves collect and report sales tax on all applicable sales to their representatives and customers, with the exception of sales to representatives who have provided proof of a valid resale certificate. The tax basis should reflect the price paid by the end consumer.

In everything they do, companies should make life as easy as possible for their independent representatives. This includes sales tax.

You can get into trouble if you ignore sales tax.

Several years ago, when I asked why an owner of a direct selling company chose to collect tax in only 13 states, he replied, “That is the number of states who have come after me to collect the tax.”

Another company chose not to collect sales tax at all. At least one state tax authority came after this company to pay the sales tax on a year’s worth of sales to representatives in his state. In addition to back taxes, penalties and interest were also assessed.

We recommend that you collect sales tax in states where your company has enrolled at least one representative. Assess and collect the tax from each representative and customer based on the city, county and zip code of the location to where the products are to be shipped. This is the most accurate approach to take when collecting and remitting taxes to the states.

In addition to pleasing sales tax authorities, companies that collect sales tax due from their representatives remove an administrative headache, freeing the representatives up for profitable pursuits like recruiting and selling.

Before you collect sales for a state, you should contact the state to apply for a tax collection number. If you’d rather not do this yourself, there are specialists who can perform this step for you. Ask Sylvina Consulting for details.