My MLM company charges new distributors a $20 enrollment fee and charges active distributors the same $20 fee annually to renew their status and keep their wholesale discount, support services, and web access -- no physical item is sent in exchange. Is that fee subject to Illinois Retailers' Occupation Tax?

Plain-English summary

A company that sells nutritional, dietary, and skin-care products through a multi-level network of independent distributors (an "MLM," comparable to Amway) asked the Department whether two fees it charges distributors are subject to Illinois Retailers' Occupation Tax. New distributors pay a $20.00 enrollment fee when they sign up, and all distributors must pay the same $20.00 fee annually to renew and remain "active." Active status carries a wholesale purchase discount, distributor support services, and web access.

No tangible item changes hands for these fees. The company used to mail new distributors a "Welcome Kit" and send active distributors a quarterly magazine, but both practices have been discontinued -- all necessary information is now provided electronically. So neither the enrollment fee nor the renewal fee comes with any physical product or item.

The Department's answer: these fees are not taxable, because they don't involve a transfer of tangible personal property. Generally, the Department does not treat membership fees as gross receipts from the sale of tangible personal property. Instead, a membership fee is treated as an intangible, and the Retailers' Occupation Tax does not reach sales of intangibles. That's true as long as the sale of the membership right doesn't include a transfer of tangible personal property. The flip side matters too: when a membership fee does represent the sale of tangible personal property, that fee is subject to tax. Because this company's enrollment and renewal fees buy only status, a wholesale discount, support services, and web access -- no physical item -- they fall on the non-taxable side of that line.

Note: this company separately obtained a different GIL from the Department on the same date (about the taxability of one of its powdered supplement products). That is an unrelated ruling on a different question and isn't addressed here.

What this means for you

MLM and direct-sales companies

If your enrollment or renewal fee is purely for distributor/membership status -- a discount tier, support services, website access, and similar intangible benefits -- and you don't send the distributor any physical item in exchange for that specific fee, the Department's general position is that the fee isn't gross receipts from a sale of tangible personal property and isn't subject to Retailers' Occupation Tax.

If you still send a physical welcome kit, product sample, or other tangible item

Watch out: the Department was explicit that when a membership fee "represents the sale of tangible personal property," that fee IS taxable. If you still mail a welcome kit, sample product, or catalog in exchange for the fee, you should not assume the fee is automatically exempt just because a similar company's discontinued-kit version was found non-taxable here -- the taxability turns on whether tangible property is actually transferred for that fee.

Keep documentation of what a fee does and doesn't include

Because the taxability hinges on whether tangible personal property is transferred in exchange for the fee, keep clear records (like this company did) showing that any physical mailings tied to enrollment/renewal have been discontinued, or precisely what is and isn't included, in case the Department or an auditor asks.

Common questions

Q: Is a $20 MLM distributor enrollment fee subject to Illinois Retailers' Occupation Tax?
A: Generally no, if the fee doesn't include any tangible personal property in exchange -- the Department treats such membership fees as intangibles, which fall outside the Retailers' Occupation Tax.

Q: Does the annual renewal fee get treated differently from the initial enrollment fee?
A: No. Both fees were charged at the same $20.00 rate, and both are treated the same way for tax purposes because neither is accompanied by a transfer of tangible personal property.

Q: What if the company still mailed a "Welcome Kit" or magazine in exchange for the fee?
A: The Department's answer here relied on the fact that both the Welcome Kit and the quarterly magazine had been discontinued and no tangible item is provided for the fee. If a tangible item were still provided in exchange for a membership fee, the fee (or the portion attributable to that item) would be subject to tax.

Q: Are the wholesale discount, support services, and web access that come with active status themselves taxable?
A: No -- these are treated as intangible benefits of membership/active status, not sales of tangible personal property, so they don't bring the fee within the Retailers' Occupation Tax.

Q: Is this ruling connected to another Illinois GIL from the same company about its "24K" supplement powder?
A: No. That is a separate, unrelated ruling request (also dated December 4, 2019) about the taxability of a specific product, not about enrollment or renewal fees.

Citations and references

Statutes cited:

• The ruling text does not cite a specific statutory or regulatory section for its conclusion. The general governing law is the Illinois Retailers' Occupation Tax Act, 35 ILCS 120.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0026-gil.pdf

Original ruling text

ST 19-0026-GIL 12/04/2019 MISCELLANEOUS
Generally, membership fees are not part of the gross receipts that are subject to Retailers'
Occupation Tax liability. The Retailers' Occupation Tax does not apply to sales of intangibles.
(This is a GIL.)
December 4, 2019
RE: Request Taxability of Enrollment and Renewal fees
Dear XXX:
This letter is in response to your letter dated May 30, 2019, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
COMPANY sells nutritional, dietary, and skin care products through a multi-level
network of independent distributors. COMPANY is considered an “MLM” or multi-level
marketer such as Amway. Our physical location is in CITY. COMPANY charges sales
tax based upon the address to which we ship and based upon suggested retail price.
COMPANY files one consolidated state sales/excise tax return in lieu of each
independent distributor filing a separate return with your state.
While we have obtained previous rulings from your state on the taxability of our
products and charges, we would like to ensure that our sales tax collection procedures
are in compliance with all current law. At this time, please provide us with a letter ruling
or binding opinion on the taxability of our enrollment and renewal fees, given recent
changes.
Distributors pay the $20.00 fee when they sign up to be a distributor and are required to
renew their status annually, at the same rate. The annual renewal fee is paid by each
distributor in order to remain in “active” status. All “active” distributors maintain their
wholesale discount on products purchased. Distributors earn a percentage discount on
the products purchased based on the volume of products purchased. Active distributors
also receive distributor support services and web access.
Previously, new distributors would be sent a “Welcome Kit” in the mail. This is no
longer the case; all necessary information is provided electronically. In addition,
COMPANY used to send a quarterly magazine to active distributors. This has also

ST 19-0026-GIL
December 4, 2019
Page 2
been discontinued. To reiterate, there is no tangible item provided in exchange for the
enrollment and renewal fees.
We are seeking assurance if this fee is taxable or tax exempt per state regulations.
Thank you for your assistance.
DEPARTMENT’S RESPONSE:
Generally, the Department does not consider membership fees to be gross receipts from the
sale of tangible personal property. Rather, membership fees are an intangible, which is not subject to
Retailers' Occupation Tax. This is the case when the sale of membership rights does not include the
transfer of tangible personal property. When membership fees represent the sale of tangible personal
property, they are subject to tax.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Debra M. Boggess
Associate Counsel
DMB:bkl