Yes, you just may have to—and in states other than where your business is located.
Most entrepreneurs and business people understand that if they have a business location, employees, or business assets or property in a state, they will be required to collect sales taxes on the sales made to the residents of that state—provided the product or service that they are selling is subject to sales tax. Unfortunately, there seems to be a rather pervasive belief among new-comers to the direct selling industry that direct selling companies do not need to collect and remit sales taxes in those states in which they have no business locations, employees, assets or property, but are doing business through their distributors. At least half of the new start-up direct selling companies that we meet with seem to be under this mistaken impression.
Unlike a purely online e-commerce company that has facilities and employees in only one or two states and processes and fulfills orders from those states, direct selling companies have “nexus” with every state in which they have distributors or other sales representatives. (“Nexus” is just a fancy legal term that means “connection” or “link”.) It is the presence of these distributors, on the ground and drumming up sales for the direct sales company, that creates the minimum nexus between the company and a state that gives the states the legal power to force the company to collect and remit sales taxes to it.
Before launching a direct selling opportunity, the founders of the company must take the time to understand their obligations concerning sales taxes. The first question that will need to be answered is whether or not the company’s products, services, sales aids, starter kits, etc. are subject to sales taxes and in which states. For example, some states impose a tax on dietary supplements while others do not. Once a company determines that some or all of its products or services are subject to sales tax, it will need to develop a strategy to register with the appropriate taxing or revenue departments in those states. Finally, the company will need to have systems in place to ensure that sales tax is collected when appropriate, the correct amount is collected, and the periodic filings and remittances are made to the correct states. Fortunately, there are some very good software solutions for this last task.
Because compliance with the sales tax requirements is a specialty unto itself, we recommend that start up direct selling companies consult with competent sales tax advisors who also have expertise in the direct selling industry. They will also need to make sure that the sales tax software solution that they have selected is fully compatible and can be integrated into their direct selling software. Should you need information about such an advisor or sales tax software solution, feel free to contact our office. We would be happy to point you in the right direction.