Cross-Sponsoring – Distributors Who Join More Than One MLM Company
A Conversation with Jeff Babener Video Series: Is cross-sponsoring legal? What rights does the distributor have? What rights does the MLM companies have? Can a company legally ask that distributors only work for one company at one time? Distributors are independent contractors. But companies may lose distributors through raiding. What are your rights? And if cross-sponsoring is legal, is it a good idea?
Cross-Sponsoring - Distributors Who Join More Than One MLM Company - YouTube
Watch the video to learn the legalities of cross-sponsoring from both the distributor’s and the company’s perspective. To view more videos in this series, visit MLMLegal.com.
Or maybe it is. In ancient Egypt the pharaohs placed a general tax on the sale of all commodities at the rate of 5% of sale price. The Romans obviously thought this was a good idea and, after their conquest of Egypt, the rate rose to 10%. For the next 2,000 years, to this day, bureaucrats have found sales tax a favorite revenue raiser.
The Bombshell… Deja vu, all over again.
In South Dakota v. Wayfair, Inc. June 21, 2018. Slip Opinion 17-494, 585 U.S. ____ (2018). The U.S. Supreme Court overturned a 50 year old precedent on how states can tax sales by out-of-state retailers, holding that its earlier 1967 and 1992 decisions were wrong, and that it needed to rectify its mistake to reflect the economic reality of today’s interstate commerce to prevent discrimination against local brick and mortar retailers that favored online out-of-state retailers. Effectively, it abandoned a decades old bright line analysis that the “physical presence” nexus that justified states to impair interstate commerce, in violation of the Commerce clause of the Constitution was being replaced by a more “amorphous” standard of an “economic reality” impact of out-of-state sellers in states that sought to impose sales and use taxes.
Impact and Response to this “missile” on contact:
For most online sellers: a thermonuclear explosion…life will never be the same.
(Keep in mind that one of the largest online sellers, Amazon, recognized the future, and had already undertaken to collect sales tax in the 45 states that impose sales/use taxes, although most of its third party vendors have not.)
For direct sellers, who sell both online and offline:
More like momentary eclipse of the sun…back to business; they have already been collecting and paying sales/use tax for decades.
Actually, says direct selling, “thank you for leveling the playing field.”
And, as to all online sellers, whether direct sellers or not, “no thank you” long term for an expected flood of creative new state taxes that will develop over the next 20 years in our “virtual and gig” economy. This is just the beginning.
First, What Just Happened?
As summarized by the Court in its syllabus and majority and dissenting opinions:
Wayfair is a major online retailer of home furnishings. Although it has substantial sales into South Dakota, it has no physical presence in South Dakota. Until the Wayfair case, 50 years of court precedent prevented states from impairing interstate commerce, in violation of Commerce Clause, U.S. Const. art. I, § 8, cl. 3, by imposing a duty on out-of-state retailers who had no “nexus” with the state. And for the Supreme Court, “nexus” required physical presence. Two famous cases set the bright line mandate of physical presence: National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Both National Bellas Hess and Quill involved interstate shipment from products ordered from catalogs.
It is estimated that these two cases caused South Dakota to miss out on $48 million to $58 million annually. And so, like many states, South Dakota sought to test the issue again, claiming that the Internet had changed things, i.e., we had a new economic reality of “nexus” that went beyond physical presence. Based on this half century standard, Wayfair refused to collect sales tax imposed by a relatively new South Dakota sales tax law that sought to impose sales tax responsibilities on out-of-state sellers who sold more than $100,000 in goods and services into the state or carried out more than 200 sales transactions.
Litigation followed, led by South Dakota requesting a declaratory judgment that its new tax was valid. Wayfair raised the long time defense of lack of “nexus” via physical presence. South Dakota lost at the trial court and State Supreme Court and requested review by the U.S. Supreme Court.
The states hit the jackpot. And it was the lucky day for the forty-one states, two Territories and the District of Columbia, all hungry for new taxes, who joined South Dakota to ask the U.S. Supreme Court to reject the test formulated in Quill. In 2017, the U.S. Government Accountability Office pegged the prospective increase to the states, if South Dakota won the Wayfair case, as being between $8 billion and $13 billion per year.
We have all heard the following claims in the zeal of promotion and recruitment.
Multi-level marketing (MLM) classes are taught at Harvard Business School.
Network marketing has produced more millionaires than any other type of business.
MLM will dominate the economy in the 21st century.
Unfortunately, these statements are “urban” MLM myths that are over the top and damage the credibility of distributors and companies, as they promote the truly positive opportunities of direct selling.
Historically, the Harvard statement preceded the actual teaching of MLM classes. A Harvard case study on a company such as Mary Kay, or a lecture by someone like Mary Kay, was twisted into the proposition that MLM was part of the curriculum. This assertion was not true, yet it was repeated over and over. Since that time, various universities such as University of Illinois at Chicago or Utah Valley State University and others have instituted courses. Many professors have joined the ranks of scholarly articles on direct selling. And so there is plenty to talk about without misrepresenting the facts.
Let us address the myth of networking marketing producing the most millionaires compared to any other type of business. Of course, MLM has had its share of millionaires, and a few billionaires from such companies as Amway. They can be found on America’s wealth lists. It is a vast overstatement in a country with 300 million people, and where there are about 16 million distributors with statistics indicating that only 1-2% make enough money to amount to a full-time living, to have millionaire-expectations. In fact, the exaggeration has prompted the FTC and state Attorneys General to demand, and leading companies have acceded, to post average earnings disclosures which accurately show the experience of typical distributors in their program. Again, there is room to be proud of the opportunity and success of many, but overreaching earnings claims taints the potential recruitment pool.
Will MLM dominate in the 21st century? The simple answer is: No. Keep in mind that U.S. MLM sales hover in the $30 billion range in an economy of that posts $17 trillion, i.e. about 1/5 of 1% of national revenue. MLM will play an important role, but, again, there is no useful purpose in being caught in an exaggeration.
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