Tax Compliance 101 for MLMs
There are few things in life that compare to the joys of tax compliance…very, very few things. Okay, the truth is — no one really wants to talk about tax compliance. But as a multi-level marketing organization (MLM), this is a must. If not, you run the risk of failing audits and will be expected to repay 100% of any taxes that you may owe for whatever reason. Here are a few things to help you stay mindful and aware of tax compliance for your MLM.
The Theory of Nexus
It all started back in 1960 with a Supreme Court case, Scripto v. Carson. This was the determining factor that brought “nexus” into the picture and changed the game of sales tax for MLMs forever.
Scripto was a company that made writing utensils and used 10 wholesalers to solicit sales in Florida. These people were not full-time employees but functioned as independent contractors who were paid by commission. Because they were not planted in a single office or location, they failed to apply sales tax to the products they were selling. This raised issues with the state of Florida and the case went all the way to the Supreme Court. In the end, the Supreme Court ruled in favor of the State of Florida due to “function over form.” This basically indicates that Scripto’s activities were more important than their brokers’ employee status and location. Thus, birthed the theory of nexus and sales tax burdens for MLMs.
Nexus is known as “the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state.” Why you, as a MLM, need to understand this is simple: you have independent distributors selling your products throughout the country. While that is great to increase your sales and widen your target market, be aware that they become a tax liability to you. Wherever you have a consultant selling your goods or services, you have nexus and that means obligations to pay sales tax to the state and local government(s), and possibly, even more, depending on where your consultant is exactly.
Other Nitty Gritty Details
Nexus is only one of the many tax issues that you need to be concerned about. It primarily addresses paying taxes based on the location of the sale but doesn’t cover what you’re selling. Depending on where you are, the products or services that your MLM is producing can be taxable, too. And at different rates. That includes clothing, food, kitchen items, and more.
Additionally, it is important to keep in mind that different tax types and jurisdictions require very different filing schedules. Ultimately, you are required to file returns to all the different state and local jurisdictions accurately and on time. These filings could be required as frequently as weekly depending on your specific location and your annual revenue. It is important to be aware of all your tax liabilities and fulfill them on time to keep your company healthy and thriving.
One more thing: tax compliance policies and rules are ever-changing. This includes tax rates, taxation amounts, product taxation, tax laws, exemptions, and more. It’s important to track these changes or use a reputable service to do it for you, as most jurisdictions experience at least one adjustment every calendar year.
It’s Too Complicated
It’s easy to feel overwhelmed and flustered talking about tax compliance, especially for MLMs and we’ve only scratched the surface. But don’t let that discourage you from facing this behemoth head-on. Whether you choose to handle it yourself, hire someone else to do it, or even find an automated solution through software technology — it only matters that you do it. Taxes are a part of life and business and if not properly addressed, you run the risk of losing everything. However, in the end, a strong company with a solid tax compliance strategy far outweighs the cost and sacrifices.