Top 3 sales tax issues for multilevel marketers
New to direct selling? Then you’re just as new to its sales tax complexities — and there are many. But we’re here to talk about the big three and hopefully unravel the twists of these tax issues.
1. Sales tax nexus
To achieve tax compliance, you must first know where you have nexus, a connection that enables a state or locality to tax your business. Direct sellers typically establish nexus through physical presence. If you operate a business in Maine, you’ll most likely have to collect and remit sales tax in Maine. If you own a site in Nebraska, chances are you’ll collect and pay taxes in Nebraska. Each state possesses its own parameters for nexus, but for direct sellers, it’s generally about physical presence in a state. And the tax obligation created by nexus isn’t limited to satellite branches: Warehouses, shipping facilities, field sales and services staff (including 1099 independent contractors), inventory, and other real estate that belongs to your business can establish nexus.
Also, some states, such as Alaska, don’t impose a statewide tax but do allow local municipalities to levy sales tax.
And what about economic nexus — a connection that obligates an out-of-state seller to collect and remit sales tax when the seller distributes products in the state and sales or transactions exceed a designated annual threshold?
Well, economic nexus typically doesn’t apply to direct selling companies because independent sellers would likely trigger physical presence nexus long before they hit an economic nexus threshold.
Direct selling companies can establish nexus in any state where their independent contractors do business. To create even more confusion for direct sellers, the person or entity responsible for reporting sales tax varies from state to state. Some states mandate each representative in that state to collect and remit tax, others allow the direct selling company to collect tax on behalf of their representatives.
Kansas, Michigan, Missouri, Texas, Washington, Wisconsin, and Wyoming don’t permit independent direct sellers (sometimes referred to as multilevel marketers) to collect and remit sales taxes but obligate all direct selling companies to do so.
2. Product taxability
In addition to physical location, products you sell will also determine the taxes you pay. And the more states where you conduct business, the more complicated it can get.
For example: In Illinois and Utah, vitamins and nutritional supplements are taxed at a reduced rate, but in 12 other states, plus the District of Columbia, they’re exempt. West Virginia taxes dietary supplements at a reduced rate.
Clothing and food appear on a vast spectrum of tax obligations among states. States also like to keep it interesting by defining the same product under a different classification: In Massachusetts, a burrito is not a sandwich, but New York says it is.
And then you have Oregon with no state sales tax … unless you sell lumber or bikes. Not a typical product for a multilevel marketer (MLM), but that just shows how states often split tax hairs.
The state you operate in or hold 1099 independent contractors isn’t the only location that matters — the many jurisdictions within those states also matter. And again, the more representatives you have in more local jurisdictions, the more complicated your tax compliance will be.
More than 13,000 U.S. sales and use tax jurisdictions bear the authority to impose tax. The majority of local taxes are administered by the state tax authority, but some are not, like in Colorado. There, certain counties levy and administer their own sales tax, but some with very explicit geographic specifications, such as this: “… Broomfield County (except certain areas immediately adjacent to I-25 and Highway 7 interchange) … ”
Peculiarities like this mean an MLM could potentially need to register separately within any of those jurisdictions. Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Rhode Island, and West Virginia are the only states that bar local jurisdiction sales tax.
Understanding sales tax for direct selling can feel overwhelming, but there are resources to help you along the way. Chat with someone at Avalara today to find out more.
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