Collection and Remittance
Most businesses register for sales tax collection authority, collect sales taxes, and remit collected taxes only in the states where the business has a physical presence (a store, an office, or a warehouse).
However, direct selling companies are regulated differently.
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.
Taxing agencies 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 (if you choose to accept resale certificates). In a few states, this preference is codified by laws that require direct selling companies to collect and remit sales tax on behalf of their independent representatives.
Whether required or preferred, we recommend that you free your representatives from the burdens of filing sales tax returns. While operating their own businesses, independent representatives of direct selling companies expect not to have to deal with sales tax registration requirements.
The tax basis should reflect the price paid by the end consumer. If yours is a home party plan company, don’t forget that the value of redeemed hostess credits is also subject to sales tax.
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.
Most states have been given permission by local jurisdictions (counties, cities, transit districts, etc.) to collect local sales taxes for the local jurisdictions. That’s the good news. The bad news is that there are several “home rule” states. For these states, companies must file sales tax returns at the local level AND the state level.
Can Sales Tax Be Ignored?
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, based in a state with no sales tax, 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 and customers in his state. In addition to back taxes, penalties and interest were assessed.
Is It All Or Nothing?
Should a company apply for a sales tax registration number unequivocally in all states? Unless you expect quickly to enroll representatives in every state that assesses sales tax, my answer is “no.” We recommend that you obtain a sales tax registration number and collect sales tax in only those 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.
Exemptions and Delivery Fees
Some states have chosen to exempt certain types of products and services from sales tax. For example, food, juice, clothing, belts, scarves, and hats are exempt from sales tax in some states.
Another item states have chosen to tax differently is delivery fees. Whether you consider your item to have a “shipping fee” or a “shipping and handling” fee matters to some states when determining sales tax applicability.
When you ship a non-taxable item into a state which taxes your delivery charge, the delivery charge applicable to the non-taxable item is not subject to sales tax. Nonetheless, the delivery charge calculated on the taxable items is taxable. That makes for some interesting tax calculation logic!
Two For One
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.
In everything they do, companies should make life as easy as possible for their independent representatives. This includes sales tax.
Before you begin collecting 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.