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The New Normal: Sales Tax and the Direct Seller

The New Normal: Sales Tax and the Direct Seller

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Published by avalara
More than any other industry, direct sellers (multi-level marketers) face sales tax compliance challenges from every angle. In most cases, direct sellers have sales tax obligations in more states than they realize. This brief highlights sales tax obligations faced by direct sellers and steps they can take to avoid unplanned audit fines and penalties.
More than any other industry, direct sellers (multi-level marketers) face sales tax compliance challenges from every angle. In most cases, direct sellers have sales tax obligations in more states than they realize. This brief highlights sales tax obligations faced by direct sellers and steps they can take to avoid unplanned audit fines and penalties.

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Published by: avalara on Sep 19, 2013
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© 2013 Avalara, Inc. All rights reserved
877.780.4848 • www.avalara.com
For many direct sellers or multi-level marketing proessionals, understanding sales tax rules alls somewherebelow repainting the copy room as a priority. Yet not understanding sales tax requirements or implementing pro-cesses to manage them can wipe out proft margins aster than a wasp ruins a gol swing.Here are three things every direct seller needs to know about sales tax compliance:
1. Should I pay or should I go? How agents create nexus and what you need to do about it.
Whether called agents, jobbers, distributors, salespeople, independent vendors, restricted vendors, wholesalers,specialty agents, reelance marketers, riends or amily, i a direct selling company uses these kinds o workers toprocess orders, the company probably has a sales tax obligation. Because the multi-level marketing sales modelrelies on agents or distributors, it virtually guarantees nexus (the connection between an entity and a taxing juris-diction that triggers a sales tax obligation). This obligation was established by a Supreme Court case in the 1960s.In the case, Scripto v. Carson, the Supreme Court ound Scripto, a direct selling company, liable or sales tax inFlorida, by virtue o their use o agents there. This case confrmed state (and applicable cities and taxing districts)authority to require similar organizations to collect and remit sales tax, as well as fne and penalize multi-levelmarketing businesses i they ail to comply.Unortunately, determining who is obligated to collect sales tax is only the beginning—ater all, there are over11,000 taxing jurisdictions in the U.S. Then there are the sales tax rates and rules themselves. These rules, address-ing everything rom how and when to fle and remit sales tax, to whether or not a product is taxable, are particu-larly complex or direct sellers who deal with a wide range o products over a large geographical area. Trying todetermine sales tax rates manually, using rate tables and zip code look-ups is virtually impossible to do correctly—especially given sales tax holidays, exemptions, and rate and rule changes.Once a company identifes the states in which it has nexus, it has an opportunity to implement a system or au-tomatically updating and tracking applicable sales tax rates and rules. Without an efcient process in place, com-panies drain valuable resources by tasking an employee to attempt the herculean task o managing this processalone when that employee can be used in a more valuable/revenue-generating role.
2. Close only counts in horseshoes. Where, when, and how to register and fle sales tax.
Where should direct selling companies register? Wherever they have nexus. Once a company has determinedwhere it has a sales tax obligation (i.e., wherever it utilizes agents or distributors), it needs to determine the regis-tration requirements or those jurisdictions.
The New Normal:
Sales Tax and the Direct Seller
Here’s where the national StreamlinedSales Tax eort (SST) comes in. The 25member states (shown in green on themap to the let) are those participatingin a national eort to streamline andsimpliy sales tax administration.Direct sellers must monitor changingsales tax rules and regulations in order toapply the correct rate and ensure agentsare collecting the right amount o salestax rom customers. In addition, they musttrack sales tax holidays, product-specifcexemptions, and items sold or resale.Errors can cost them dearly.

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