Direct Sellers and the End of Quill
Multilevel marketing, party plan, relationship selling, direct sales — whatever you call it, the modern version of a Tupperware party will be affected by a recent decision by the Supreme Court. Until the decision on a case called South Dakota vs. Wayfair, a seller didn’t have to collect sales tax unless they had a physical presence in the state. This rule was based on a decision the Supreme Case made in a case know as Quill. The new case overturns the decision called Quill, and allows states to make all sellers collect sales tax. The court’s overturn of Quill is bound to cause changes.
Multilevel marketing involves individuals who sell products to friends and neighbors, gaining a commission on those sales from the parent company. Herbalife, Pampered Chef, Young Living, and Mary Kay are examples of this business model.
Who collects the sales tax?
Typically, the seller collects the sales tax. In many states, all retailers are required to collect sales tax. However, the definition of “retailer” can be different from one state to another.
In some cases, you will collect the sales tax at your local rate, send it in to the company you represent, and they will take care of filing and remittance.
Kansas, Michigan, Missouri, Texas, Washington, Wisconsin and Wyoming all require the company to file, and will not allow independent representatives to file or remit sales tax individually.
In other states, though, you may be required to collect and submit the sales tax yourself. For example, Minnesota requires direct sellers to find out whether their company takes care of sales tax, and if not, to register and comply with sales tax requirements individually.
If you’re doing direct sales in your own neighborhood, you can find out the relevant sales tax requirements from your CPA or your lawyer, and follow the rules. It gets more complicated, though, if there are other places involved.
For example, if you hold a sales party while visiting another state, you will have to deal with a new set of rules. A state can decide that your party establishes enough of a presence in the state that you must collect sales tax.
If the company you represent allows online parties or online sales direct to consumers, you are even more likely to be affected. With the overturn of Quill, you may have to collect sales tax in states you’ve never even visited. Often, sales tax is collected according to the address where the goods are received. The addresses of the people receiving the products might be in another state.
The case of South Dakota vs. Wayfair specifically says that states can require companies to collect sales tax on ecommerce transactions, even if those companies have no physical presence in the state. So your party hostess’s Aunt Susie in a neighboring state can order as part of your hostess’s party — and you may have to collect sales tax.
It’s not just that you have to find out the rate of sales tax collected in Aunt Susie’s jurisdiction. Some of the most popular direct sales items are food, vitamins, or nutritional supplements. These items may be exempt from tax in your state, but taxable in Aunt Susie’s state. They may be taxed at a lower rate.
There’s more. Shipping is taxable some states and not in others. So you might need to calculate Aunt Susie’s order with the cost of shipping included, and another guest’s order before adding shipping.
What’s the easiest way for direct sellers to handle sales tax?
If you never have sales outside of your own jurisdiction, or if you work with a company that handles sales tax for you, talk with your CPA. If you have customers in multiple states, however, you will need to have up to date information about the sales tax regulations in every jurisdiction where you have sales.
There are at least two problems with this. First, there will certainly be changes. The Supreme Court decision in Wayfair says that states can now make new laws requiring sellers to collect sales tax. Each state can make its own new laws.South Dakota doesn’t require sellers to collect sales tax if they have fewer than 200 transactions, or do less than $100,000 in business in South Dakota. Alabama has set their limit at $250,000 per year.
Chances are there will be more court cases on some of these new laws (Alabama is already in court). Either way, there will certainly be changes in laws about sales tax.
What’s more, it’s hard to predict where you will have sales. If you don’t register and don’t collect sales tax correctly but later discover that you must collect and remit sales tax, you will probably have to pay the tax from your own pocket.
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