United States (Updated on February 2023)

General Information

 

The United States is a constitutional republic. There are laws of relevance to business at both the federal, state and local levels.

At the US federal level, the Federal Trade Commission (FTC) Cooling-off Rule allows the consumer three (3) business days to cancel the purchase or lease of consumer goods or services costing more than $25 without obligation or penalty. Sales must have been initiated by the seller or its personal representative and occur away from the seller’s place of business.

The seller must furnish the buyer with a receipt or copy of a contract, which shows the transaction date, the customer’s name and address, and a notice of the customer’s right to cancel the transaction within three (3) business days. The seller must also provide the notice of cancellation form (in the exact language provided by the FTC) in duplicate, using a minimum 10-point boldface type. The seller must also inform the customer orally of his and her right to cancel.

If the customer cancels the sale, the seller must cancel the transaction within ten (10) days. Any deposits or down payments must be refunded; any negotiable instruments must be cancelled and returned and any security interests created must be terminated. The customer must enable the seller to recover any goods already delivered within twenty (20) days after the sale has been cancelled. It is the seller’s obligation to retrieve the goods.

Forty-eight states have the three-day cooling-off period. Alaska has a five day cooling off period and North Dakota extends the cancelation period to 15 days for those individuals 65 years of age or older.

All States prohibit the promotion or operation of ‘pyramid schemes’ through various forms of legislation. In general, a pyramid scheme is a plan or operation for the distribution of products, services or money, whereby a person gives consideration (payment) for the opportunity to receive compensation based primarily on the introduction of other participants into the plan, rather than on the sale of products to consumers. Some of these statutes are specifically drafted to combat pyramid schemes – other entities use a variety of means (e.g., lottery laws, endless chain scheme statutes) which do not specifically mention pyramid schemes, but which are used to combat these frauds. These statutes can be civil or criminal in nature; some states use both civil and criminal laws.

The Council of State Governments (CSG), one of the country’s preeminent state public policy organizations, adopted model anti-pyramid scheme legislative language into its 2004 Volume of Suggested State Legislation (2004 SSL, Vol. 63), based on the 2003 South Dakota law that we worked on with the South Dakota attorney general and legislature.  Specific legislation was subsequently enacted into law in Idaho, Washington, Georgia, Utah, Nebraska, Virginia, Tennessee, Indiana, New Jersey, South Carolina, Mississippi, Michigan, and Ohio as those states moved to update their laws. It was adopted in Arkansas in 2019, Pennsylvania in 2020, Alabama in 2021, and Kansas in 2022. Ten other states have similar laws consistent with the CSG language, including Illinois, Louisiana, and Oklahoma. Twenty-eight states have adopted this or similar language, and it has been successfully used to prosecute purported pyramid schemes in multiple jurisdictions.

Additionally, court rulings have given more clarity to defining the “ultimate user” when determining if personal use of products (e.g. internal consumption) by distributors are to be considered legitimate sales. In 2014, FTC v. BurnLounge, BurnLounge was found to be a pyramid scheme. However, the Ninth Circuit Court of Appeals held that “in fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues (that support the commissions) are generated from the purchases of goods and services that are not simply incidental to the purchase of the right to participate in the money-making venture.”

Multi-Level Marketing

While there is no specific federal regulation of multi-level marketing companies, the states of Georgia, Louisiana, Maryland, Massachusetts, Wyoming, and the Commonwealth of Puerto Rico require certain filing requirements for multi-level marketing companies. In addition, Montana has a multi-level filing requirement as part of its anti-pyramid statute, although USDSA members are exempt from this requirement. In these states, ‘multi-level distribution companies’ generally are defined as companies that market products or services through independent agents or distributors at different levels and in which participants recruit or sponsor others and receive compensation based upon the recruit’s sale of products.

Most states require the company to appoint an agent for the service of process and abide by certain regulations relating to allowable income presentations, payment of compensation to participants, and the offer to repurchase unsold inventory.

Direct selling marketing plans which compensate a participant for the sales made by the participant as well as the sales of those the participant has sponsored or recruited must ensure that compensation in the plan is ultimately paid only for the distribution of products or services to ultimate users-or individuals who consume or use the products or services, whether or not they are participants in the plan. Such marketing plans typically impose low fees for the right to engage in the direct selling opportunity, involve minimal investment requirements in sales materials or inventory, and provide participants in the plan a bona fide right to return unsold products to the company at reasonable commercial terms at 90% of the original purchase price.

Prohibition on Products

Generally, there are no prohibitions on the sale of any consumer products by direct sellers. Certain regulated industries (e.g., wine and liquor, securities, insurance) have requirements that apply across the board to all sellers in those industries, and the regulations do not discriminate against direct selling distribution methods. Some product lines (e.g., dietary supplements, telephone cards) have had requirements placed on their sale at the federal and state levels. Direct selling companies selling these product lines must thus comport with these various state and federal requirements.

Generally speaking, neither a company nor a salesperson can make “drug claims” about a product unless they are approved by the U.S. Food and Drug Administration. Drug claims are when a marketer claims a product is intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease.

All other product claims must be supported with competent and reliable scientific evidence. “Results not typical” language is generally deemed insufficient to be a disclaimer about a non-typical result. Product claims must be substantiated by competent and reliable scientific evidence.

Testimonials and endorsements can’t contain claims that the company could not make.

Credit Restrictions Country
No information.

Money Collections
No information.

Licenses

26 USC § 3508 of the Internal Revenue Service Code provides that direct sellers are non-employees for federal employment tax purposes if they:

• Are engaged in the trade or business of selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis which the Secretary prescribes by regulations, for resale (by the buyer or any other person) in the home or otherwise than in a permanent retail establishment,
• Are engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or otherwise than in a permanent retail establishment, or
• Are engaged in the trade or business of the delivering or distribution of newspapers or shopping news (including any services directly related to such trade or business),
• Substantially all the remuneration (whether or not paid in cash) for the performance of the services described in subparagraph (A) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

The services performed by the person are performed pursuant to a written contract between such person and the person for whom the services are performed and such contract provides that the person will not be treated as an employee with respect to such services for Federal tax purposes.

Failure to meet this three-part test does not necessarily mean that direct sellers will be treated as employees for federal tax purposes by the Internal Revenue Service (IRS). Section 530 of the 1978 Revenue Act, contains an on-going moratorium which prevents the IRS from retroactively reclassifying direct sellers as employees as long as their independent contractor treatment is reasonably based.

Even if a direct seller failed to meet the tests provided in the 1978 Revenue Act, the determination of employee or independent contractor status could still result in a favorable outcome under state common law. Forty-three (43) states now have an exemption identical or similar to the federal exemption language in their state unemployment codes. (Some states also have direct seller employment exemptions for workers compensation purposes.) The remaining states are relatively evenly divided between an economic realities test (commonly known as an ABC test, consisting of a combination of three independent factors) and the common law test (which basically emphasizes control).

The nature of direct sellers as ‘outside salespeople’ also generally exempts them from coverage under the wage / hour provisions of the Fair Labor Standards Act.

Earnings Claims
Pursuant to the US Direct Selling Association Code of Ethics, any earnings representation made by a company or member of the salesforce (included, but not limited to representations of homes, vehicles, or vacations) must be truthful, accurate and not misleading. Current and prospective salespeople must be provided with sufficient information to understand that actual earnings may vary significantly, not everyone will achieve the represented level of income, and such amounts are before expenses (if any). All earnings representations must also be adequately documented and substantiated. Furthermore, if a specific independent salesperson’s commission or bonus payments are included in an earnings representation, any distributions made for those payments to others in the sales organization must be disclosed or deducted from the figure(s) used.

Taxes and Fees

Individual

Generally, two kinds of business taxes apply to individual direct sellers – income taxes and Social Security taxes. Since both the federal income and Social Security tax are pay-as-you-go taxes, quarterly estimated payments must be made.

Income Tax. Each direct seller must file an annual income tax return as a sole proprietor, partner or corporation, depending on the nature of the business.

Self-employment Tax. This tax is the Social Security tax for those individuals who work for themselves (whether as sole proprietor or as a partner in a partnership). As with income taxes, direst sellers must make quarterly estimated payments.

IRS 1099 Misc. Information Returns. For a direct seller who has individuals in their downline to whom they pay more than $600 in prizes or awards or to whom the direct seller sells more than $5,000 worth of goods during the year, an information return is required.

Corporate

Income Tax. Generally, a direct selling corporation is obligated to pay a corporate tax in states where its headquarters are located or in which it has distribution or manufacturing facilities (otherwise generically referred to as ‘bricks and mortar’ presence). Public Law 86-272, 15 U.S.C. Section 381 protects the ‘mere solicitation’ of orders for tangible property by direct sellers if those orders are sent out of state for approval or rejection and the orders are shipped or delivered by a direct selling company from outside the state.

Information Returns. As individual direct sellers described above, direct selling companies who pay more than $600 in non-employee compensation or who sell more than $5,000 in goods to one or more direct sellers during a calendar year must file an information return. Failure to file such a return can result in substantial penalties. Submission of an incorrect return can result in back-up withholding.

Tax Collection Responsibilities. Approximately 7,000 state and local jurisdictions across the country impose a sales / use tax on the sale of goods or services. Direct sellers usually collect and remit these sales taxes in two ways. The first approach is for the company to collect and remit these taxes on behalf of its direct sellers directly to the state or locality. Alternatively, the individual direct seller may be required as an independent business person to obtain the necessary sale-for-resale certificates to collect these taxes. About twenty (20) states have vendors collection allowances which partially compensate the company or individual direct sellers for their costs of collection.

Social Security
As independent contractors, direct sellers do not have Social Security deducted from their commission checks by companies. Rather, the individual direct seller is responsible for paying self-employment tax on their direct selling earnings. The self-employment tax paid by direct sellers and other self-employed individuals is similar to Social Security and Medicare taxes that are withheld from employees.

Others
Business Opportunity and Franchise Statutes

While not intended to encompass direct selling, business opportunity laws and franchising laws should be examined by direct selling companies to ensure that their companies are within the specified exemptions for these statutes.

Twenty-six (26) states have specific laws regarding business opportunities. These statutes are aimed at ‘get rich quick’ schemes, where participants expend typically large amounts of money, are promised support for a venture or locations for a venture, and who are promised that their monies will be refunded if the venture is unsuccessful. The business opportunity statutes protect consumers by requiring registration with the state and disclosure of certain information (i.e., company name, officers, litigation against the company, financial information). These statutes also typically contain anti-fraud provisions, where companies can be held liable if they misrepresent information to consumers.

Franchise statutes regulate a method of business where the business has a trademark component and controls the method of business used by others. Typical state franchise laws also have registration, disclosure and anti-fraud elements, similar to business opportunity statutes.

Direct selling companies are neither franchises nor business opportunities. These types of statutes typically have minimum threshold amounts, over which the provisions of the law are triggered. In franchising statutes, these minimum amounts are specified in their definitions of a ‘franchise fee’. The majority of states have threshold amounts of $500 for upfront costs, and many also include a $500 threshold for certain materials necessary for selling, such as a sales kit or inventory. The thresholds can be as low as $200 in some jurisdictions, and direct selling companies must analyze how their initial costs may affect their need to comply with the various state business opportunity and franchising statutes.

In 2012, the Federal Trade Commission’s new Business Opportunity Rule became effective. In the final rule, the FTC said that it would not be practicable to apply the requirements of the Business Opportunity Rule to MLM companies.

Business Opportunity Definition

While it is not the intent of the FTC to cover direct sellers under the Rule, direct sellers should be aware of the provisions of the Rule and the key definitions to ensure that none of their activities would bring them under the Rule.

The key definition in § 437.1 that determines whether a particular business is covered or not is that of business opportunity, which states:

Business opportunity means a commercial arrangement in which:

(1) A seller solicits a prospective purchaser to enter into a new business; and

(2) The prospective purchaser makes a required payment; and

(3) The seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will:

(i) Provide locations for the use or operation of equipment, displays, vending machines, or similar devices, owned, leased, controlled, or paid for by the purchaser; or

(ii) Provide outlets, accounts, or customers, including, but not limited to, Internet outlets, accounts, or customers, for the purchaser’s goods or services; or

(iii) Buy back any or all of the goods or services that the purchaser makes, produces, fabricates, grows, breeds, modifies, or provides, including but not limited to providing payment for such services as, for example, stuffing envelopes from the purchaser’s home.

Presumably most direct selling companies are going to satisfy section (1) and (2) of this definition, assuming there is some charge for participation.

That leaves consideration of section (3). Section (3)(i) doesn’t seem to in any way affect direct sellers, however section (3)(iii) raised concern because of the use of the term “buy back” and the DSA Code of Ethics required buyback provision. DSA and other member companies argued for a change or clarification to this language. The FTC did not ultimately change the language but made it clear in comments that it is not their intent to cover situations where a company agrees to buyback product for a refund such as the DSA required buyback which is in fact a protection for distributors. The FTC stated in the final report that this provision was only designed to, “capture work-at-home business opportunities in which the seller provides the purchaser with some supplies and the purchaser converts those supplies into a product or other “good” for repurchase by the seller or other person.”

Note:

As part of the Federal Trade Commission’s period review of existing rules, they are currently, as of February 2023, exploring changes to the Business Opportunity Rule, seeking comment from the public on the rule’s effectiveness and a potential expansion to the rule to cover other types of money-making opportunities, such as coaching or mentoring programs, e-commerce opportunities, or investment opportunities.

The FTC is also currently, as of February 2023, considering proposing a rule to address deceptive or unfair marketing using earnings claims.

The USDSA is actively involved with both of these endeavors.

Outlets, Customers, Advertising, and General Business Advice

That leaves section (3) (ii) which speaks of providing outlets, accounts, or customers. Companies should look at this provision in light of any representations or promises made in recruiting and signing-up distributors. Direct selling companies that neither provides an internet outlet or customers in anyway should not have an issue with the provision. However, companies that do may want to consider how they operate to ensure they are not covered by the Rule.

In § 437.1 (m) this definition language is further defined as:

Providing locations, outlets, accounts and customers means furnishing the prospective purchaser with existing or potential locations, outlets, accounts, or customers; requiring, recommending, or suggesting one or more locators or lead generating companies; providing a list of locator or lead generating companies; collecting a fee on behalf of one or more locators or lead generating companies; offering to furnish a list of locations; or otherwise assisting the prospective purchaser in obtaining his or her own locations, outlets, accounts, or customers, provided, however, that advertising and general advice about business development and training shall not be considered as “providing locations, outlets, accounts, or customers.”

Advertising, general business advice and training offered by direct selling companies does not trigger coverage under this provision. A direct selling company offering a replicated website or crediting sales to distributors made on the corporate website or referring customers through a company website should not trigger coverage under this part of the definition.

Companies should still consider to what extent they or their distributors promise to provide either internet outlets or customers during the recruiting process. But given the overall desire on the part of the FTC to not cover direct sellers and the unlikelihood that potential direct sellers are relying on a promise to provide outlets or customers, the risk of coverage because of this section appears to be relatively low for companies that operate in this manner. However, an offer by a company, including a direct selling company, that indicated the company would provide customers to the distributor and or sales via an Internet outlet with little work on the part of the distributor and where a distributor reasonably relied on these inducements could presumable be covered under the Rule.

The WFDSA International Guide to Direct Selling Legislation is a guide and is not exhaustive either in terms of subjects presented or for all areas of concern to direct selling companies. It is intended to cover general areas of concern. The Guide is not a substitute for legal counsel but only intended to alert you to the general nature of laws and regulations affecting the direct selling industry in a particular country. Consequently, before beginning an operation in any foreign country, it is strongly recommended that competent legal counsel be consulted. While every effort has been made to ensure that the information contained in this Guide is accurate, the variety of sources used makes absolute verification difficult. Further, laws and regulations also can change from time to time without notice. Therefore, the WFDSA cannot be held liable for the information included in this publication.

Direct Selling Self-Regulatory Council (DSSRC) – (Self-Regulation)

The Direct Selling Self-Regulatory Council (DSSRC) was launched in 2019 as a third-party, independent self-regulatory program administered by the non-profit organization BBB National Programs. DSSRC is funded by the Direct Selling Association (DSA).

SSRC monitors the entire U.S. direct selling industry and embodies the following principles:

• Clear industry standards on issues such as product and earning representations.
• Relevant best practices from other self-regulatory models
• A process that both monitors and enforces strict business principles; and
• Guidance to raise the bar of excellence for DSA members and the entire direct selling channel.

https://www.dsa.org/consumerprotection/dssrc

https://bbbprograms.org/programs/DSSRC/

 

 

The WFDSA International Guide to Direct Selling Legislation is a guide and is not exhaustive either in terms of subjects presented or for all areas of concern to direct selling companies. It is intended to cover general areas of concern. The Guide is not a substitute for legal counsel but only intended to alert you to the general nature of laws and regulations affecting the direct selling industry in a particular country. Consequently, before beginning an operation in any foreign country, it is strongly recommended that competent legal counsel be consulted. While every effort has been made to insure that the information contained in this Guide is accurate, the variety of sources used makes absolute verification difficult. Further, laws and regulations also can change from time to time without notice. Therefore, the WFDSA cannot be held liable for the information included in this publication.