Who Profits in MLM?

Jon Taylor was a well-known researcher of multi-level marketing. One of his studies involved a telephone survey of over 200 tax preparers in Idaho and Utah. He wrote about his experience:

A manager of H&R Block in northern Utah, told me that during his 25 years of doing over 12,000 tax returns a year between he and his group, they could not remember a single client who had reported a significant profit over any appreciable period of time in MLM! (One reported a sizable profit one year – but went bankrupt the next.)

Another accountant told me of a seminar company that trains tax preparers across the country. The topic of MLM’s often comes up in connection with “hobby losses,” and the concensus is that it is extremely rare to see profits from MLM participation. And a tax softwaredeveloper, who dealt with thousands of tax preparers across the country, said he had asked about 100 of them if they had ever seen a profit reported from MLM participation. None had. This was out of a total of over a million tax returns.

Dr. Taylor did the telephone survey of tax preparers because he believed they were in the best position to know if profits occur in MLM. Because Utah is a hotbed of MLM activity, tax preparers there would likely have the most experience with MLM participants.

His findings confirmed what he suspected. A few people at the top of the pyramid are getting rich at the expense of thousands of downline recruits. The downline spends money on products in order to participate in the MLM, and they do so based on false representations of the income potential.

The tax preparers reported to Dr. Taylor:

  • Almost no one was reporting profits form MLM on their tax returns
  • They couldn’t remember anyone reporting significant MLM income

He found three counties in Utah where no MLM companies were based. He talked to 33 tax preparers there who had 14,400 clients all together in 2002. They estimated preparing over 300,000 tax returns over their careers. Many of their clients participated in MLMs at some time, but the tax preparers could not remember even one clinet reporting significant profits over an extended period of time.

For comparison, Dr. Taylor talked to 33 tax preparers in Utah County, where a number of MLM companies have their headquarters. He thought that people at the top of the pyramid were more likely to live near the MLM headquarters. All together, these tax preparers recalled 185 tax returns with significant profits from MLMs. These are the few rich distributors who get commissions from large downlines that live in other states. However, they represent a tiny percentage of the distributors.

The tax preparers who had clients at the top of the pyramid said things like:

  • “It’s like any other business. Those who don’t make the effort will fail.”
  • “The problem is that the majority of people who sign up and expect to make money don’t really know how to sell – or don’t ‘work the system.”
  • “You have to work at it and be patient. If you stick with it, it can be very profitable.”

But those in the counties where there were no MLM profits to be had said things like:

  • “There’s money to be made in MLM – at the top.”
  • “I would never advise a friend to do MLM – unless he needs a tax write-off.”
  • “It’s a scam.”
  • “It’s a pyramid scheme.”

What does this prove? Once again, there are a handful of people who get to the top of the pyramid and profit. All of those profits are simply transfers of money from the thousands of people below them in the pyramid. Those thousands all lose money, as they can’t sell enough products or generate enough commissions from recruiting to cover their expenses.

21 Comments

  1. Lazy Gardens

    The people who start MLMs start them with the top of the pyramid already populated with their family and their buddies from the previous MLM. Then they and their buddies recruit a few “movers and shakers” who have large downlines in another MLM that they can bring over …

    By the time you hear about it – at the “pre-launch” propaganda stage – the moneymakers are mostly already in place, waiting for the gullible hordes to start signing up and handing them money.

    The other moneymakers are like Levi Strauss and the 1849 Gold Rush. He made his money selling supplies to miners. MLM money can be made selling the websites, the special tracking tools, the coaching …

  2. There is a particularly scummy SeneGence scag on YouTube who’s always bragging about the 20 year history of the company, yet simultaneously touts the “ground floor” BS – I always ask how it can be ground floor if it’s 20 years old…?

    She always blocks me or shadow bans me.

    1. enorth

      “how it can be ground floor if it’s 20 years old…?”

      I heard an It Works video where, as usual, the “leader” spouted the, “Because of IW, I retired my husband” line. But much later in the video, she slipped up and mentioned her husband was home because he was injured at his job.

      Liars.

  3. Chris

    I’ve prepared a lot of tax returns, had a few clients doing MLMs, not one of them ever showed a profit. Fortunately, every one of them quit in two years or less, in part because l always made a point to say that side business losses could only be deducted against other income for the first three years. After that, the IRS considers the money-losing business to be a hobby. That could have wound up being a rather expensive and dull hobby.

    1. MLM Radar

      What so many people don’t realize is that big MLM / MK losses only get you little bitty tax breaks.

      If you’re in the 15% tax bracket, like so many people, and you lose $1,000 doing Mary Kay, you only cut your tax bill by $150. The other $850 is gone forever.

      True, you’ll get a few dollars more from your state income tax return, if your state has an income tax. But it’s not really enough more to make a difference.

      What could you do with that $850, if you hadn’t lost it to Mary Kay? Probably quite a bit. I know I could.

      1. Char

        The result of being a pyramid scheme participant.

        I hope people see the big picture and not the dollars signs – or lack thereof. Otherwise, there are pleny of unscrupulous “opportunities” with much bigger payouts; and those are probably tax free!

      2. Weekended

        MLM uplines talk about income-tax write-offs as though they mean the consultant gets free stuff. They don’t talk about how a person has to spend serious money in order to get a deduction.

      3. Lazy Gardens

        If you’re in the 15% tax bracket, like so many people, and you lose $1,000 doing Mary Kay, you only cut your tax bill by $150. The other $850 is gone forever.

        ^^^^^^ THAT! Also, unless you are earning enough from your Mary Kay business to actually pay taxes on, you are losing money. That money is coming from somewhere, and it’s usually the household budget, your kid’s college fund (that you never started because you were going to be rolling in MLM money), or your spouses salary. MLMs are experts in siphoning off money without their participants noticing it.

        Calculate what your SPENDABLE income would have been without your Mary Kay income, expenses and all those “tax breaks” from Mary Kay …. then calculate what is is with all the Mary Kay overhead. I think you will be surprised.

        1. Char

          Just in case MLMers want to argue that they got $850 worth of product, therefore not lost, and saved $150 on tax.

          #1 It’s worth remembering that MLMing products are over-priced and short on quality per cost because the “opportunity” is the focus.

          I think one needs to think about what the $850 would have gotten them with non-mlm products; or how much less money they would have spent for the same amount of non-MLM stuff.

          #2 Would they have spent any money at all on those products without the “opportunity” lure?

          #3 Most importantly! $1000 spent on pyramid scheme products makes you a supporter of a scam.

          1. Reputo

            Except that you can’t deduct personal use products as a business expense. That’s not to say that people don’t anyway, but there is ample tax court history of MLM trying to deduct all product purchases only to have some or all of them denied because they were for personal use (i.e. not sold).

            So $1000 of purchases for personal use gets you $0 tax savings (plus with the way MK charges sales tax, you paid twice as much in sales tax, in other words, you don’t pay less in taxes, you pay MORE in taxes).

            1. Char

              Point well made about “actual” personal use, but my post was about MLM/Ponzi sympathizers who have an excuse for joining and counter “total loss” because they have a product to show for it.

              What do you call $1000 worth of product that doesn’t get sold and sits on your shelf?

              – I’ll just use it up myself, or give it away to charity, to make myself feel better about spending/losing the money in the first place.

  4. Juliet

    Outstanding article, Tracy!! “Nuts and bolts” data – just the facts of the matter, that is so much harder for someone to dispute. I so appreciate both your time in sharing and Jon Taylor for providing the study.

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