What About Sales Tax?

When we are consumers and go to the cash register in a store, we pay the sales tax without a second thought. It’s clear that we owe the tax, and so we pay it without complaint (at least most of us do!).

But, when we start our own direct selling, party plan or MLM companies, well, then sales tax becomes a muddy issue to which companies respond quite differently.

For many years, I worked for a leading MLM software company and so I had an opportunity to see how companies of all sizes dealt with the sales tax collection issue.

My favorite memory is of the company that collected sales tax in 13 states. When I asked the owner about why he 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 favorite tale is the story of a larger company who 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 distributors in their state. In addition to the back taxes, penalties and interest were also assessed.

State tax authorities tend to view MLM distributors and direct selling consultants differently from traditional businesses.

Since most distributors and consultants operate their businesses as part-time ventures, tax authorities strongly prefer that MLM and direct selling companies themselves collect and report sales tax on all sales to distributors and consultants, except from those who have applied for and provide evidence to the company of having a resale certificate.

However, in my role as a business and software consultant, often I find that companies make decisions to collect and remit sales tax in a limited fashion. Some collect only in the state in which the main office is located. Others attempt to collect sales tax in other states, but do so only using a flat rate per state.

I don’t recommend either of these approaches. Clearly, it is best to collect sales and use tax based upon the city, county and zip code of the location where the sale took place... and to do so nationwide. This is the most accurate approach to take when collecting and remitting taxes to the states. Anything less is a temporary approach that can be costly to the company.

A good tax rate database and software that can use the database are both required. Two such databases are Zip Sales and Vertex.

For further information on sales tax collection or for help in launching or growing your company, contact Jay Leisner of Sylvina Consulting directly at 503.244.8787.