How to File Sales Tax as a Multi-Level Marketing (MLM) Business

Charles Maniace
May 7, 2021

Direct selling companies and multi-level marketing (MLM) businesses have numerous complexities to consider when it comes to sales tax calculation and reporting requirements. Along with an expansive physical nexus footprint, direct sellers must know how their products and services are taxed around the country. It’s a daunting task when facing it alone. 

Where are you selling?

Knowing whether or not physical presence nexus has been established is a critical first step for direct sellers. It’s important to consider nexus first because once nexus is established, the responsibility to collect tax begins immediately.

Physical nexus is established through people or property. For example, if a business has employees or contractors, such as distributors or brand ambassadors, then the physical nexus has likely been met. However, even in the absence of a direct salesforce, attending trade shows, conferences or seminars can sometimes be enough. The rules vary from state to state.

Even if you happen to avoid establishing physical presence nexus in a state or two, you also need to be concerned about economic nexus. Economic nexus is established simply through sales activity, and in many states, $100,000 in sales or 200 individual transactions is enough to trigger a sales tax compliance obligation.

Understanding how to tax

Many direct selling companies offer goods that are subject to complex and nuanced sales tax requirements. With every state having a sales tax administer their tax independently, the complexities multiply. For example, 38 states have special tax rules for food. However, each of those states may define “food” a little differently. Several states exclude candy and soft drinks from their food exemption, and within those states the terms “candy” and “soft drinks” can also be defined differently. Does a beverage need to be carbonated to be considered a soft drink? Well, it depends.  

Likewise, eight or so states exempt clothing intended for everyday wear from sales tax. Some, like the Commonwealth of Massachusetts, exempt clothing but only on a portion of the sales price. If that were not complex enough, every state with a clothing exemption defines “everyday wear” a little differently. A fishing vest may not seem like something you would wear unless you were actually fishing (usually not an everyday activity) but in some states, fishing vests would qualify. 

Layered on top of that are the many temporary sales tax holidays that happen every year, many of which include an exemption for clothing.

When considering your sales tax responsibility, don’t just think about the products your distributors/brand ambassadors market to the public. Consider the services you provide to them. Do you charge your ambassadors a membership fee? If so, what does that membership fee entitle them to? Depending on what they get, the membership fee could be taxed. 

Similarly, most direct sellers offer their salesforce a “replicated website.” This is often accomplished through hosted software, or software-as-a-service (SaaS). While not taxable everywhere, access to SaaS software is taxable in many jurisdictions.

When direct selling companies have a thorough understanding of what it takes to be sales tax compliant, they can better ensure their companies meet their legal obligations and avoid audit exposure. Partnering with sales tax experts is always helpful (and sometimes necessary) in achieving a simplified sales tax compliance experience.

Take Action

Learn more about the sales tax complexities related to direct selling by checking out our webinar with Squire.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.


Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15 year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC and more.
Share This Post
Share on facebook
Share on twitter
Share on linkedin
Share on email

IPT VAT & Fiscal Reporting
June 14, 2021
Meet the Expert: Christina Wilcox, Director of Customer Success, EMEA at Sovos

Meet the Expert is our series of blogs where we share more about the team behind our innovative software and managed services. As a global organisation with indirect tax experts across all regions, our dedicated team are often the first to know about new regulatory changes, ensuring you stay compliant. We spoke to Christina Wilcox, […]

E-Invoicing Compliance EMEA VAT & Fiscal Reporting
June 14, 2021
Saudi Arabia Publishes Final Rules on E-invoicing

The General Authority of Zakat and Tax’s (GAZT) previously published draft rules on ‘Controls, Requirements, Technical Specifications and Procedural Rules for Implementing the Provisions of the E-Invoicing Regulation’ aimed to define technical and procedural requirements and controls for the upcoming e-invoicing mandate. GAZT recently finalized and published the draft e-invoicing rules in Saudi Arabia. Meanwhile, […]

North America Tax Information Reporting Unclaimed Property
June 11, 2021
Securities Unclaimed Property

The securities industry continues to be an area of focus from an unclaimed property standpoint. Individual issuers and transfer agents are being targeted for audits.  The auditors are using traditional techniques to confirm that holders are in compliance with unclaimed property laws but they are also using nontraditional techniques to identify audit populations and shifting […]

June 10, 2021
New Bipartisan Bill Could Lift Ban on USPS Alcohol Shipping

On May 18, 2021, congressional bi-partisan co-sponsors introduced the USPS Shipping Equity Act, a bill that would allow the Postal Service to ship beverage alcohol directly to consumers over the age of 21. If passed, the bill would lift a Prohibition-era ban that currently prevents the USPS from shipping wine and other alcohol directly to […]

EMEA VAT & Fiscal Reporting
June 9, 2021
Romania SAF-T: Are you Ready for 1 January 2022?

It’s been more than a few years since Romania first toyed with the idea of introducing a SAF-T obligation to combat its ever-growing VAT gap. Year after year, businesses wondered what the status of this new tax mandate was, with the ANAF continuously promising to give details soon. Well, the time is now. What is […]