Sales Tax Basics For Your Business - Interview with Daniel Garrett of Garrett Consulting LLC
Since so much of Network Marketing involves retail, distributors need to find out their resposibilities regarding sales tax. We asked Daniel Garrett, a sales tax law specialist, to give a few basic guidelines for Network Marketers.
His first advice is to educate yourself on the tax laws in your area. In some states, you may need to pay state, county and city sales tax. If your Networking company is based in a different state, they may not know all the taxes you are responsible for with each sale.
Does this mean you should get a tax identification number and handle it all yourself? For the most part, Dan says no. Except for those distributors who warehouse large amounts of product for a month of more (rare in these days of shipping directly from company to consumer), it is best to let the company handle sales taxes for you. Just be sure you know how the company is getting the job done.
That leads into Dan's second item: Find out your company's sales tax policy. Your independent distributor agreement may have explained that the company would pay all sales tax. That's a good place to start, but you need to know more. (If you haven't thought about sales tax on what you retail, you really need to know more!) Find out the company's policy for filing returns and paying the tax collected from you. According to Dan, some companies don't have any policy regarding sales tax. You are essentially trusting those companies to file promptly and without mistakes, in every jurisdiction, using money you have already paid to handle the taxes. No matter how ethical your company is, that's a pretty tall order.
For most states, the ideal situation is for the company to have a sales tax agreement, which protects you from being audited by the state as long as you let the company collect and remit the sales tax. Some companies even insist on handling sales tax for their distributors because it is a factor of their agreements with various states. An agreement makes the company liable for filing the tax returns on time and making payments-- it is written proof that you are no longer responsible for sales tax. If they make a mistake, the agreement keeps it from trickling back to you in the form of an audit.
The agreement with the state may also, once again depending on your area, include county responsibilites. What about local taxes? They may not be quite as critical an issue as the state taxes, but you need to know the details before you can decide that. Many cities do not see it as cost effective to audit all the Networkers who retail within city limits, but that is not protection from being made an example to the industry for non-payment of sales tax. You may need to encourage your company to make an agreement with your city tax authority (if they have not already done so).
The third thing to check is whether the sales tax is charged on suggested retail price even when you are purchasing for personal consumption. If you pay sales tax on a suggested retail price of $30, yet you want the product for yourself and actually pay only $20, you have paid more sales tax than is due. Check your company's policy for handling such different transactions. No need for you to pay more tax than you actually owe!
Dan suggests that each distributor gets an education in all the taxes that apply, like occupation, privilege, and use taxes. It's easier to do research than to be audited.
Daniel T. Garrett, J.D., C.P.A. of Garrett Consulting LLC provides State and Local tax consulting services to Direct Selling and Multi-Level Marketing entities in every State. Dan Garrett has a diverse professional background in State and Local tax, and extensive experience in representing and assisting Direct Selling and Multi-Level businesses with their State and Local tax issues. He is a member of the Arizona State Bar and the Tax Section of the State Bar, a Certified Public Accountant and a member of the ASCPA, has been a speaker at State and Local tax seminars sponsored by the State Bar, the Arizona Department of Revenue and the Direct Selling Association, among others. You can reach Garrett Consulting at(602)592-9650 firstname.lastname@example.org
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Reprinted with permission from Upline, Upline Legal - MAY 1999, 888-UPLINE-1, http://www.upline.com