If a multi-level marketing company sells through independent distributors in Colorado, is sales tax figured on the suggested retail price or on what the customer actually paid, and who is liable if a distributor fails to collect it?
Plain-English summary
A multi-level marketing (MLM) company — one that sells through a network of independent distributors — asked Colorado how to handle sales tax. The Department gave two practical answers.
What number do you tax? The tax is based on the money actually received "in cash and credits," not on the suggested retail price (SRP). So:
- When the company ships directly to a Colorado customer on a distributor's behalf, tax is on what the customer actually paid, not the SRP.
- When the company ships to a distributor who keeps the product for personal use, tax is on the discounted value the distributor paid.
- When the company ships product a distributor will give away as samples, tax is on the discounted price the distributor paid for it.
Who is the retailer, and who is liable? Colorado law lets the Department treat distributors as agents of the company (§ 39-26-103(9)(e), C.R.S.). The company elected that treatment, so the company is the retailer making the sales. That has three consequences: the distributors do not need their own sales tax licenses; it does not matter whether a distributor works out of a store, a medical office, or an office building (same answer either way); and because the distributors are the company's agents, the company is liable for any sales tax a distributor fails to collect or remit.
What this means for you
Multi-level marketing and direct-sales companies
If you elect to treat your distributors as your agents, you become the retailer for Colorado sales tax. That simplifies licensing — your distributors don't each need a license — but it concentrates the risk: you are on the hook for tax a distributor pockets or forgets to remit. Tax the real consideration received, never an inflated "suggested" price, and remember that product a distributor consumes or gives away as samples is taxed on the discounted amount the distributor actually paid.
Independent distributors
Under the agent model, you generally don't carry your own sales tax license, and the company collects and remits on the sales. But the company is relying on you to collect tax correctly; a failure flows back to the company, and the relationship is governed by your agreement with it.
Accountants and tax professionals
The two pillars are Reg. (39-)26-102.7(a) (tax base is consideration actually received in cash and credits) and § 39-26-103(9)(e) (agent election). The agent election collapses the whole distributor network into a single retailer for state purposes — useful, but it makes the company the liable party. See FYI Sales 9 and 62. Note the home-rule caveat: many Colorado cities collect their own tax and are not covered here.
Common questions
Q: Do we tax the suggested retail price or the actual sale price?
A: The actual consideration received in cash and credits, under Reg. (39-)26-102.7(a) — not the suggested retail price.
Q: Do our distributors each need a Colorado sales tax license?
A: Not under the agent election. When distributors are treated as the company's agents, the company is the retailer, and the distributors are not required to hold their own sales tax licenses.
Q: What if a distributor doesn't collect or remit the tax?
A: The company is liable. Because the distributors are agents of the company and the company is treated as the retailer, the company answers for uncollected or unremitted tax.
Q: Does it matter where the distributor operates from?
A: No. The Department gave the same answer whether the distributor works out of a retail location, a health-care office or hospital, or an office building.
Q: Can we rely on this letter for our own business?
A: No. This is a General Information Letter — general guidance only. It is not binding on the Department and cannot be relied upon by any taxpayer, and it does not address self-collected home-rule city taxes.
Citations and references
Statutes, rules, and guidance:
- § 39-26-103(9)(e), C.R.S. (Department may treat distributors as agents of a vendor)
- DOR Regulation (39-)26-102.7(a) (tax base = money received in cash and credits, not suggested retail price)
- FYI Sales 9; FYI Sales 62 (direct-sales companies and distributor licensing)
- DRP 1002 (list of self-collected home-rule jurisdictions)
Related Colorado rulings on the tax base, agents/retailer status, and resale documentation: [[gil-07-006-gift-card-stock]], [[gil-07-028-exemption-certificates]], [[gil-08-003-wholesale-sales]].
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-07-029.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-2007-29
XXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
December 4, 2007
Re: independent distributor sales tax
Dear XXXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated July 2, 2007, re: taxability
of product shipped directly to customers or indirectly through independent distributors. We apologize for the
time it has taken to respond to your inquiry.
Issues
You ask a series of questions, noted below, regarding the sales tax collection responsibilities of a multi-level
marketing company.
Background
You state that your company is a multi-level marketing company located in [State]. The company markets its
products through independent distributors who are located throughout the United States, including Colorado.
You ask whether tax should be calculated based on the suggested retail price (SRP) or on the actual retail
sales price charge the customer or distributor under three different scenarios.
1. You ask if the company ships the product directly to customers in Colorado on behalf of the distributor is the
tax computed based on the SRP or the sales price actually paid by the retail customer. Response: The tax
is computed on amount of money received or due in cash and credits, not the suggested retail price. DOR
Regulation (39-)26-102.7(a).
2. In other cases, the company ships the product to distributors who use the product for their own
consumption. The distributor does not pay the SRP but, rather, a discounted value. Response: Tax is
computed on the discount value.
3. Finally, the company may ship product to distributors who state that they provide the product as samples to
potential customers. The distributor does not pay the SRP but, rather, a discounted sales price. Response:
Tax is computed on the discounted sales price.
The company states that it is a direct sales organization which collects sales tax on behalf of the distributors
located in Colorado. You ask a series of questions regarding resale certificates.
1. You ask whether the company, as a multi-level marketing company, can accept resale certificates from the
distributors. Response. Colorado law authorizes the department to treat distributors as agents of a vendor.
§39-26-103(9)(e), C.R.S. Thus, your distributors are treated as your agents and you are the retailer making
sales to the customers. The distributors are not required to have a sales tax license. See FYIs Sales 9 and
62. You can view and download this publication by visiting our web site at: www.revenue,state.co.us (go to
Taxation > FYIs > Sales Tax).
2. You ask in questions 2 through 4 whether the company can accept a resale certificate if the distributor
operates out of a retail location, health care office or hospital, or an office building. Response: See
response to question 1, immediately above.
3. You ask whether the company is liable for sales tax in the event that the distributor fails to collect or remit
the sales tax from customers. Response: Yes, the distributors are agents of the company and the
company is treated as the retailer. Therefore, the company is liable for uncollected or unremitted sales tax.
Please note that the department does not collect sales and use taxes for “home-rule” cities and counties. You
can find a list of these jurisdictions by visiting our web site at:
www.revenue.state.co.us (go to Taxation > Forms > Businesses > Sales and Use > DRP 1002)
Please contact those governments for information about their taxes.
Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed
to it by taxpayers. However, the information and answers provided here are not binding on the Colorado
Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive
Director, who by statute is the only person having authority to bind the Department, has not formally reviewed
and/or approved this response.
Respectfully,
Office of Tax Policy
Colorado Department of Revenue