Direct-seller consumer products include intangible services

Plain-English summary

Chief Counsel advised that section 3508 does not limit consumer products to tangible goods. The cited cases treated a home-study course and cable television subscriptions as consumer products even though they involved intangible services. The advice said cases should not be developed on a tangible-versus-intangible distinction because both types can qualify.

Ruling snapshot

• Question: Can intangible consumer services qualify as consumer products for the direct-seller rules in section 3508?
• Outcome: advice given
• Key authorities: IRC § 3508; Prop. Treas. Reg. § 31.3508-1(g)(3)

Full text (IRS public release)

ID: CCA_2016102012173170
UILC: 3508.01-02

Number: 201652020
Release Date: 12/23/2016
From:
Sent: Thursday, October 20, 2016 12:17:32 PM
To:
Cc:
Bcc:
Subject: 3508 direct sellers - tangible vs. intangible consumer products

Jason –

As you point out, case law regarding section 3508 eliminates the distinction between tangible
and intangible consumer products put forward in Proposed Reg. section 31.3508-1(g)(3). See,
e.g. Cleveland Institute of Electronics, Inc. v. United States, 787 F. Supp. 741 (N.D. Ohio
1992)(holding that for section 3508 purposes, the term consumer product included both
tangible consumer products and intangible consumer services; thus, a home-study course was a
consumer product); R Corp. v. United States, 94-2 U.S.T.C. ¶ 50,380, (D. Fla. 1994)(following
Cleveland Institute in holding that cable television subscriptions were intangible services and
therefore a consumer product under section 3508).

In Cleveland Institute, the government argued that consumer products were limited to tangible
products, as stated in the proposed regulations. The court rejected this distinction between
tangible and intangible consumer products, pointing out that it had been six years since the
regulations were proposed and they had still not been issued in final form. The court instead
relied on the purpose of the statute, as set forth in the legislative history to section 3508--to
reduce the number of controversies regarding employment tax status and to increase
compliance on the part of independent contractors. It found that these purposes were best
served by interpreting the term consumer products to include both tangible consumer goods
and intangible consumer services.

CCA 199940006 is the latest advice I’m aware of. It cites to 1996 training materials which state:
“cases should not be developed based on a distinction between tangible and intangible
products; i.e., both types of products will qualify.”

Rebecca