A growing business leads to growing tax concerns.
As the famous quote goes, there are two certainties in life: death & taxes! As your company grows so too inevitably will your tax concerns. Now is a good time to make sure you won’t find any unexpected surprises when preparing your MLM or Party Plan Taxes for fiscal 2015. It’s a big job! It’s gotta get done because a growing business leads to growing tax concerns. Use these tips from Avalara.com to make sure your heading in the right direction.
Sales Tax & The Direct Seller
A while back, 1960 to be exact, there was a Supreme Court case, Scripto v. Carson, that expanded the definition of how states determined a ‘physical presence’ or nexus for companies that used a direct selling model. Scripto was a company using commissioned brokers or agents to sell their product throughout Florida but was not charging sales tax on these transactions. Scripto had no offices in Florida but the state claimed that they had an obligation to collect sales taxes based on the agent model they were using to push product. These agents were not employees of Scripto but Florida argued that their “continuous local solicitation and forwarding of orders” triggered the obligation to collect. The Court ruled in favor of Florida and thus began the sales tax burden for Direct Selling and Multilevel Marketing (MLM) organizations.
The exponential growth that can occur in your affiliate base helps drive revenue but also can exponentially increase your sales tax compliance requirements. It’s important to note that Direct Selling companies are required to collect and remit the sales tax for transactions, not their agents or affiliates. Here are some common challenges that MLM and Direct sellers need to be concerned with as their agent network grows:
• As was referenced above with Scripto v. Carson, wherever you have an agent, you have nexus. This requires you to register for a Sales Tax ID in the necessary states and locals.
• Accurate calculation of sales tax for all of the appropriate jurisdictional taxes including the state, county, city and special taxing jurisdictions. There can be up to 6 taxing authorities on one ‘roof-top’ location so it’s important you get it right.
• Specific product taxability requirements in many states and jurisdictions that vary. Examples of products that have different tax rules depending on when or where you sell them include clothing and apparel, dietary supplements or food items. I’ll spare you the details here, but the taxability of a dietary supplement can vary depending on having ginseng on the label versus cod liver oil.
• Filing Returns and paying the states or jurisdictions on time and correctly. Your filing schedule can be annual, semi-annual, quarterly, monthly or even weekly depending on the states rules and your annual revenue. Customers appropriately call it the “monthly filing crunch” as you’ve got to file and remit payment before the 20th of the month or you’ll be subjected to penalties.
• State sales tax audits are inevitable for growing companies that make it past the 3 year mark.
• ‘We’re now a real business’ period. Keeping a detailed audit trail is critical which includes sales and use tax transaction history, exemption certificates and copies of sales tax returns filed. Important to note, most states have a look back period for audits of up to 7 years, which means they have a lot of data they can scour through to try and find mistakes.
Managing sales tax is just a cost of doing business and you need to do it right or you’ll expose your business to audit risks. So what are your options? You can try to do it on your own. You can hire your own tax team to try and handle it. You can pay a bunch of 3rd party accountants to manage it. Or you can automate it with a company that offers a solution that marries compliance with technology. Whatever you do, you cannot bury your head in the sand and think it will go away.
Direct selling companies are moving away from manual sales tax management to ‘cloud-based’ solutions that integrate with their ‘order-to-cash’ systems and automate their entire function from calculation to reporting to filing. The reasons are tied to cost, risk reduction, having a platform that easily scales with their growth and the obvious one, NO ONE likes dealing with sales tax. These solutions are allowing them to focus their resources on activities that grow their business instead of doing the government’s business. Less Taxing, More Relaxing is a reality for companies that automate it!
IDSTC integrates with Avalara for automated tax calculation, reporting and filing. Having a solution seamlessly integrated with your MLM / Party Plan software provider reduces the hassle and headache associated with keeping on top of your taxes and fillings.
Here are some upcoming webinars from Avalara to help guide you through this tax season:
February 16 at 11 am PST
March 29 at 11 am PST
Looking for a place to start? Contact IDSTC today to lean more about how we can help you find solutions for managing your Party Plan or MLM company today.