Distributor Privacy: Social Security Numbers

By Jeffrey A. Babener
© April 1998

The Privacy Issue.

In an age of big government, computer networks and the internet, it seems as if everyone is compiling a data dossier on us. Coupled with what most individuals feel as an invasion of privacy with the fraudulent use of driver's licenses, credit cards, stolen cellular phone numbers, etc., individuals have good reason to seek privacy for their personal and financial information. In the wrong hands, private information, such as their social security numbers, may be used for fraudulent or unauthorized purposes.

The Company Dilemma.

Network marketing companies, on the other hand, are placed in the dilemma of collecting private information such as social security numbers precisely for the reason that they offer a business opportunity to individuals, pay commissions and must file form 1099 with the IRS for commissions paid. When companies ask for social security numbers from new distributors, many distributors are suspicious and some even refuse to provide a social security number or federal tax identification number. In fact, it is not unusual for companies to receive protest letters from distributors who believe that it is an invasion of their privacy or United States law for companies to require a social security number or federal tax identification number as a condition to accepting the distributor application.

In a rare instance, distributors are tax protestors who deny that they are required to pay social security or U.S. income taxes. These protests are easily dismissed. A more difficult situation arises, however, with individuals who write to their companies claiming that, under the Privacy Act of 1974, it is unlawful to require an individual to disclose or furnish his or her social security account number, unless the number is specifically required by law.

The typical argument of distributors, which often appears on a form memorandum supplied by a tax protest organization, states that social security account numbers are not to be used for identification pursuant to the Privacy Act of 1974. Protesting distributors maintain that the Act provides that it is unlawful to deny an individual any right, benefit or privilege provided by law because of an individual's refusal to disclose his or her social security account number. In addition, they further argue that no organization can require any individual to disclose the social security number or refuse to enter into a business transaction because the person does not disclose their number.

Yes or No.

So, what's the answer? Notwithstanding a distributor's concern for privacy, there is no federal law preventing private parties from asking for someone's social security number, from using that person's social security number as an identifier or from refusing to deal with the person if that person refuses to give a social security number.

It is true that Congress passed a law in 1974 called "The Privacy Act" designed to curtail expanding uses of the social security account number. However, Section 7 of Public Law 93-579 states that "It shall be unlawful for any federal, state or local government agency to deny any individual any right, benefit or privilege provided by law because of such individual's refusal to disclose his social security account number." The typical protesting distributor often ignores the part of the Act stating that it only applies to government organizations.

As originally introduced, the bill contained language stating that private parties would not have the ability to request social security numbers. However, this language in the initial draft of the public law that became the Privacy Act of 1974 was amended out of the law. As a private business, a company has the right to contract with whomever it chooses.

Company Obligations.

In addition, under Internal Revenue laws, a company is required to request and report the social security number or the tax identification number of distributors. Therefore, it can require social security numbers or tax identification numbers from potential distributors, and refuse to deal with those who do not provide the number without fear of violating federal law.

In fact, a network marketing company is required to ask for social security numbers or tax identification numbers from its distributors for the purpose of reporting income to the IRS. The IRS imposes a penalty of $50 for each failure to comply with an information reporting requirement such as the requirement under IRS Section 6109. Under that section, a company reports the income of distributors, including on any return the social security number or tax identification number of the person. The IRS can levy fines on a company for not supplying taxpayer identification numbers on 1099 forms or other reporting forms.

A company can avoid fines if it adequately documents its attempts to secure the social security number from a distributor. The company will use IRS form W-9 to request the number from the distributor. At the time the 1099 is filed, the company swears in an affidavit that it sent the W-9 to the distributor, and received no reply.

However, if a representative refuses to supply a social security number or tax identification number, and the company is willing to "do business" with the distributor, the company must engage in what is called "backup withholding" on the distributor's earnings. Where a distributor refuses to provide a social security number, the company must withhold 31% of that distributor's compensation. Therefore, if a company is willing, it is possible to do business with a distributor who refuses to give a taxpayer identification number, provided that distributor is willing to live with having 31% of his or her income withheld.

Be Mad at Congress Not the Company.

Understandably today, individuals have a right to be suspicious about those who ask for private information such as social security numbers. However, network marketing companies have an obligation to do so. If distributors want to change the law, they should write to Congress. Their company is merely living within the legal environment that exists.

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