Does a multi-level marketing company owe sales tax on the annual renewal fee its distributors pay to stay active, and on the fee for its online Dashboard and personal-website tools?

Plain-English summary

A multi-level marketing company sells goods through a network of distributors. It charges distributors two kinds of fees and asked whether either is subject to sales tax: an annual renewal fee (to stay on the books as an "active" distributor entitled to buy goods at a volume-based discount, and to receive a quarterly magazine), and an optional fee for a "Dashboard" and personal website (online tools to track and manage the distributorship and add customers).

Renewal fee — not taxable here. The Department's rule is that a membership fee is taxable if paying it results in the transfer of taxable tangible personal property to the buyer (it cited GIL 14-008, where a membership fee was taxable because members received a guidebook, marketing materials, and a magazine). Here the Department found two pieces of property potentially tied to the fee — a magazine and access to discounted goods — and concluded neither makes the fee taxable:

• The magazine is given to customers for free too, so the company isn't really selling it to distributors for the fee. It's better characterized as promotional material incidental to the renewal fee.
• Access to discounted goods can make a fee taxable in some cases — the Department's example: a program where members pay a fee, then buy a good for $1 that nonmembers pay $3 for, so the fee is really a partial prepayment of the taxable purchase price. But that only works if the discounted purchase is itself taxable. Here the distributors buy at wholesale for resale, which is a nontaxable purchase, so the renewal fee tied to those exempt purchases is also nontaxable.

Dashboard / website fee — depends on ASP vs delivered software. Colorado does not tax application service providers (ASPs) — companies that host software on their own servers and give customers access (§ 39-26-102(15)(c)(ii)(A)). If the company instead delivers software to distributors, that software is taxable only if it meets all three requirements: pre-packaged for repeated sale, a non-negotiable license, and delivered in a tangible medium. Miss any one, and it's not taxable. On the facts (cloud-based access), this reads as nontaxable ASP-style access.

What this means for you

MLM and direct-sales companies

A distributor membership/renewal fee isn't automatically taxable — and isn't automatically exempt. Look at what tangible property the fee actually transfers. If it's just promotional material (especially something you also hand out free) plus the right to buy goods you sell to distributors as exempt resale purchases, the fee rides along as nontaxable. If your members instead get a kit of taxable goods, or a real discount on taxable retail purchases, the fee can become a taxable partial payment of price (as in GIL 14-008).

Software and platform fees

Hosting tools on your servers (ASP model) for distributors to log into is not a taxable sale of software in Colorado. You only get into taxable territory if you deliver software that is pre-packaged for repeated sale, under a non-negotiable license, and on a tangible medium — all three. Cloud dashboards and web portals generally don't meet that test.

Accountants advising direct-sellers

Two clean rules to carry forward: (1) a membership fee follows the taxability of the property it transfers — exempt-resale goods make the fee nontaxable, taxable goods/kits make it taxable; (2) ASP-hosted software is untaxed, with delivered software taxable only on the three-part test. Note the home-rule-city caveat.

Common questions

Q: Is an MLM distributor renewal/membership fee taxable in Colorado?
A: Not automatically. It's taxable only if paying it transfers taxable tangible personal property to the distributor. Here it didn't — the magazine was incidental promotional material and the discounted goods were exempt wholesale-for-resale purchases — so the fee was nontaxable.

Q: When would a membership fee be taxable?
A: When it effectively buys taxable property — for example, a member kit of taxable goods, or a discount on a taxable retail item where the fee is really a partial prepayment of the price (the Department's $1-vs-$3 example), as in GIL 14-008.

Q: Is a fee for an online dashboard or distributor website taxable?
A: Not if you host the software and provide access (the ASP model). Delivered software is taxable only if it's pre-packaged for repeated sale, under a non-negotiable license, and delivered in a tangible medium — all three must be met.

Q: Can I rely on this letter?
A: Only as general guidance. A General Information Letter is not binding on the Department and makes no specific determination. For a binding answer on your facts, request a private letter ruling.

Citations and references

Statutes and rules:
- § 39-26-104(1), C.R.S. (tax on retail sales of tangible personal property)
- § 39-26-104(1)(a), § 39-26-102(7)(a), C.R.S. (tax on the purchase price)
- § 39-26-102(15), C.R.S. (tangible personal property; computer software three-part test)
- § 39-26-102(15)(c)(ii)(A), C.R.S. (application service provider software not subject to tax)

Related guidance (cited by the Department):
- GIL 14-008 (membership fee taxable where members received a guidebook, marketing materials, and a magazine)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-16-012.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-16-012
July 6, 2016
XXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Distributor Fees
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXX (“Company”) a request for guidance on whether
Company is liable for sales tax on fees paid by distributors to Company.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues and
is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of a
fee. For more information about general information letters and private letter rulings, please see
Department Rule 1 CCR 201-1, 24-35-103.5.
The Department treats your request as a general information letter. It is important to remember that
general information letters, such as this one, are general discussions of tax law and are not a
determination of the tax consequence of any particular action or inaction. If you would like the
Department to issue a private letter ruling on the issues you raise, you must submit a new request
and provide the fee in compliance with Department Rule 1 CCR 201-1, 24-35-103.5.
Issues
1. Is Company’s renewal fee subject to sales tax?
2. Is Company’s Dashboard and personal website fee subject to sales tax?
Background
Company is a multi-level marketing company that sells goods through its network of distributors.
Distributors pay an annual renewal fee to Company to be maintained on Company’s records as
“active” distributors. Active distributors purchase Company’s goods at discounted prices. The
discount is measured by the distributor’s volume of sales. Active distributors also receive
Company’s magazine on a quarterly basis.

Company offers distributors the option to purchase Company’s “Dashboard” and a personal website.
The Dashboard gives distributors access to information on all activity on the distributorship and
online tools to track and manage business. The personal website allows distributors to add
customers and downline distributors to their own shopping cart and online sponsoring.
Structure of Analysis
To determine whether Company is required to collect sales tax on the fees, the Department will
examine the following questions:
1. Is the fee the purchase of taxable tangible personal property at retail pursuant to § 39-26104(1)(a), C.R.S.?
2. Is the Dashboard and personal website tangible personal property as defined in § 39-26102(15), C.R.S.?
a. Is Company an application service provider?
b. Is the computer software tangible personal property pursuant to § 39-26-102(15),
C.R.S.?
Discussion
Colorado levies sales tax on the retail sale of tangible personal property.1 Tax is calculated on the
purchase price paid by the buyer.2 The specific issue you raise is whether the renewal fee, which is
a fee paid by a customer, is included in the sales tax calculation. To decide this issue it is important
to point out that you have identified two items of tangible personal property that are transferred to the
buyer (i.e., the distributor) in connection with the payment of the membership fee: the distribution of
a magazine and purchases of discounted goods. We examine each item of property below.
We previously issued a general information letter in which we stated that a membership fee is part of
the sales tax calculation if payment of the fee results in the transfer of taxable tangible personal
property to the buyer.3 In that case, the membership fee was taxable because members received a
guidebook, materials for their use in marketing their business to consumers, and a magazine in
exchange for the membership fee.
However, there are important differences between Company’s membership and the membership
described in our prior guidance. Company represents that not only does it give the magazine to
distributors but it also gives the magazine to customers for free. This suggests to us that Company
is not selling the magazine to distributors in exchange for payment of the renewal fee. Rather, the
magazine appears to be more appropriately characterized as promotional material used by
Company to market its business plan and goods to distributors and customers. Payment of the
membership fee is primarily for the purpose of staying on the “active” list of distributors who are
entitled to purchase goods at a discounted price. The magazine is, in this light, incidental to the
renewal fee. Therefore, we believe that payment of the renewal fee does not constitute the sale of
the magazine.
We next turn to the question of whether buyer’s access to discounted goods is a basis for subjecting
the fee to tax. In some instances, fees paid by buyers to access discounted goods may be subject
to tax. For example, if a retailer has a membership program that allows members who pay a
membership fee to purchase goods for $1, but nonmembers pay $3, the payment of the

1 § 39-26-104(1),C.R.S.

2 § 39-26-104(1)(a) and 102(7)(a),C.R.S.

3 See, General Information Letter (GIL) 14-008.

2

DR 4010A (06/11/14)

“membership” fee is likely a partial payment of the purchase price and the retailer’s gross taxable
sales and, therefore, should be included in the calculation of sales tax.
However, the membership fee is not taxable if the purchase of the discounted tangible personal
property is itself not taxable. For example, the fee is not taxable if the member’s purchase of goods
is an exempt purchase for resale. In the case you describe, distributors are making nontaxable
wholesale purchases for resale to the ultimate consumer. Therefore, the membership fee itself also
appears to be nontaxable.
With respect to the Dashboard and personal website fee, Colorado does not impose sales tax on
application service providers of software.4 Application service providers (ASP) typically offer
customers access to computer software maintained on the ASP’s servers. In contrast to an ASP
business model, if Company actually delivers computer software to distributors, then the software is
subject to tax if it is pre-packaged for repeated sale, has a non-negotiable license, and is delivered in
a tangible medium.5 If the computer software does not meet each of these three requirements, then
it is not taxable.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. Please note that the
Department administers state and state-collected city and county sales taxes and special district
sales and use taxes, but does not administer sales and use taxes for self-collected home rule cities
and counties. You may wish to consult with local governments which administer their own sales or
use taxes about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax
for more information about state and local sales taxes.
This ruling is premised on the assumption Company has completely and accurately disclosed all
material facts. The Department reserves the right, among others, to independently evaluate
Company’s representations. This ruling is null and void if any such representation is incorrect and
has a material bearing on the conclusions reached in this ruling. This ruling is subject to modification
or revocation in accordance to Department Regulation 24-35-103.5.
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this redacted
version of the ruling will be made public within 60 days of the date of this letter. Please let me know
in writing within that 60 day period whether you have any suggestions or concerns about this
redacted version of the ruling.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

4 § 39-26-102(15)(C)(ii)(a), C.R.S.
5 § 39-26-102(15), C.R.S.

3

DR 4010A (06/11/14)