For a multi-level-marketing company, is a distributor's annual 'active status' renewal fee taxable, and what about fees for a mobile app sold alone or bundled with a dashboard and website?

Plain-English summary

A multi-level marketing (MLM) company sells nutritional, dietary, and skincare products through independent distributors, some in New York. It charges distributors three things and asked which are taxable: (1) a $25 annual renewal fee to stay an "active" distributor (keeping their wholesale discount and support services); (2) a $4/month mobile app (a dashboard and order management); and (3) a $15/month bundle (the app + a dashboard + a personal website). The Department split the answer:

• The $25 renewal fee is NOT taxable. It isn't a charge for taxable property or services — it buys the right to continue distributing the company's products, to keep the earned wholesale discount on products bought for resale, and to receive support services (phone orders, order tracking, help with online services, policy explanations). That's not within the sales tax base.

• The $4 mobile app fee IS taxable as prewritten computer software. "Tangible personal property" includes prewritten software regardless of how it's delivered (Tax Law § 1101(b)(6)); prewritten software is software not designed to a specific purchaser's specifications (§ 1101(b)(14)). The app is offered to all distributors off-the-shelf, so it's prewritten software and taxable when sold to a New York distributor.

• The $15 bundle is taxable in full. The dashboard is also prewritten software (online tools to view/track/manage the distributorship and downline data), and the personal website is software too (it runs presentations and manages the shopping cart and online sponsoring). Even though it wasn't clear whether the website was customized, it doesn't matter: when taxable and exempt items are sold for a single price, tax applies to the entire charge (20 NYCRR 527.1(b); Matter of Strata Skin Sciences). So the whole $15 monthly bundle is taxable for a New York distributor.

The practical lesson: a pure "right to participate / keep your discount" membership fee can be non-taxable, but the moment a fee buys software — or a bundle that includes software at one price — it's taxable, and bundling can't shield the exempt pieces.

What this means for you

MLM and direct-sales companies

Separate your fee types. A genuine renewal/right-to-distribute fee (no software or taxable service attached) can be non-taxable. But fees for apps, dashboards, back-office portals, and replicated personal websites are typically prewritten software and taxable to New York distributors. Map each fee to what the distributor actually gets.

Watch the bundle trap

If you sell software together with anything else for one price, the entire charge is taxable — you don't get to treat the non-software portion as exempt (20 NYCRR 527.1(b)). If part of the package would be non-taxable on its own, you generally must separately state it at a reasonable price to keep it untaxed; lumping it into a single bundled price taxes the whole thing.

SaaS / hosted software is still "prewritten software"

The app and website are accessed remotely (the website "cannot be downloaded"), yet they're still taxable prewritten software — New York taxes the right to use prewritten software regardless of delivery method. Remote access/hosting doesn't make it a non-taxable service.

Accountants and tax professionals

The opinion turns on § 1101(b)(6)/(14) (prewritten software as taxable TPP), the characterization of the renewal fee as a non-taxable right-to-participate charge, and the single-price bundling rule in 20 NYCRR 527.1(b) confirmed by Matter of Strata Skin Sciences (Tax Appeals Tribunal, May 5, 2022). To preserve any non-taxable component in a mixed offering, separately state it at a reasonable charge.

Common questions

Q: Is an MLM "active status" renewal fee taxable in New York?
A: Not on these facts. The $25 annual fee buys the right to keep distributing products and maintain an earned wholesale discount, plus support services — not taxable property or services — so it isn't subject to sales tax.

Q: Why is the mobile app fee taxable?
A: The app is prewritten computer software (offered to all distributors, not custom-built), which is taxable tangible personal property under Tax Law § 1101(b)(6)/(14), even though it's accessed remotely.

Q: Why is the whole bundle taxable when part of it might be exempt?
A: Because it's sold for a single price. When taxable and exempt items are combined at one price, tax applies to the total (20 NYCRR 527.1(b); Strata Skin Sciences). To keep a component untaxed, separately state it at a reasonable price.

Q: Does hosting/remote access make the software a non-taxable service?
A: No. New York taxes prewritten software regardless of how it's delivered, including remotely accessed (non-downloadable) software.

Q: Can I rely on this opinion?
A: No. An Advisory Opinion binds the Department only as to the petitioner and the facts presented. It illustrates the Department's reasoning but cannot be relied on by another taxpayer.

Citations and references

Statutes and regulations:
- Tax Law § 1105(a) (sales tax on retail sales of tangible personal property, including prewritten software)
- Tax Law § 1101(b)(6) (prewritten computer software is tangible personal property, regardless of delivery medium)
- Tax Law § 1101(b)(14) (prewritten software = software not designed to a specific purchaser's specifications)
- 20 NYCRR 527.1(b) (single price for taxable and exempt items: tax on the total)

Authority referenced in the opinion: TSB-M-93(3)S; TSB-A-08(62)S (prewritten software); Matter of Strata Skin Sciences, Tax Appeals Tribunal, May 5, 2022 (single-price bundling).

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao.htm
• Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales/24-42s.htm
• Printer-friendly PDF: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a24-42s.pdf

Original ruling text

TSB-A-24(42)S
Sales Tax
October 8, 2024

The Department of Taxation and Finance received a Petition for Advisory Opinion from [ REDACTED ] (“Petitioner”). Petitioner asks whether the fees charged to its distributors for renewal of a distributor’s “Active” status, and fees to access Petitioner’s mobile application program, sold separately or as part of a bundle, are subject to New York State and local sales taxes.

We conclude that the renewal fee Petitioner charges its distributors is not subject to sales tax. Petitioner’s charges for access to its mobile application are receipts from the sale of prewritten computer software, which are subject to sales tax. When Petitioner charges a distributor one price for access to its mobile application software and other bundled offerings, the entire charge is subject to sales tax.

Facts

Petitioner is a multi-level marketing company that sells nutritional, dietary, and skin care products through its network of independent distributors, some of which are located in New York State. Distributors are required to pay Petitioner an annual $25.00 renewal fee to remain an “active” distributor of Petitioner’s products and maintain their wholesale discount, which is earned based on the distributor’s purchase volume and the purchase volume of other distributors in their organization or “downline.” Active distributors also receive certain support services from Petitioner, including the ability to place and receive phone orders, order tracking, assistance with online services and explanation of Petitioner’s policies and procedures. 

Petitioner offers distributors the option to obtain Petitioner’s mobile application software. Use of this software is free for the first 30 days, after which Petitioner charges a monthly fee of $4.00. A distributor accesses the mobile application by using a password and log-in that remain valid for as long as the distributor pays the monthly fee. The mobile application enables the use of a dashboard and order management on a mobile device.

Petitioner also offers its distributors a “bundle” of products for a $15.00 monthly fee. The bundle includes the mobile application software, access to Petitioner’s dashboard, and a unique personal website for the distributor. The dashboard gives distributors immediate access to online tools to track, manage and grow their business. More specifically, the dashboard allows the distributor to view data about sales and sponsoring volume of distributors in their downline, such as whether a distributor is close to advancing to a higher level. The personal website enables a distributor to give presentations using a mobile device and add customers and downline distributors to their own shopping cart and online sponsoring. The personal website software can be accessed using a computer, but cannot be downloaded.

Analysis

Renewal Fee

The $25.00 fee Petitioner charges its distributors to renew their active status in Petitioner’s program is not a charge for property or services on which sales tax is imposed. Instead, it is a charge for the right to continue distributing Petitioner’s products, to maintain their earned discount on products purchased for resale, and to receive certain support services from Petitioner. Thus, Petitioner’s renewal fee is not subject to sales tax. 

Mobile Application & Bundled Products

Sales tax is imposed on the receipts from every retail sale of tangible personal property and the receipts from every sale (excluding sales for resale) of certain services. See Tax Law §§ 1105(a) and (c). “Tangible personal property” includes [c]orporeal personal property of any nature” and also includes “pre-written computer software, whether sold as part of a package, as a separate component, or otherwise, and regardless of the medium by means of which such software is conveyed to a purchaser.” Tax Law § 1101(b)(6). Prewritten computer software is computer software that is not designed and developed by the creator to the specifications of a specific purchaser. Tax Law § 1101(b)(14).

Here, Petitioner charges distributors a $4.00 monthly fee for its mobile application. Petitioner describes the mobile application as software that allows a distributor to access its dashboard and order management tools. The mobile application is available to all distributors and is not designed to the specifications of each distributor. Accordingly, the mobile application is prewritten computer software and is subject to sales tax when sold to a distributor in New York. See TSB-M-93(3)S; TSB-A-08(62)S.

Petitioner’s charge for its bundled products is also subject to sales tax. Petitioner charges $15.00 per month for a bundle that includes the mobile application, a dashboard and a personal website. As discussed above, charges for the mobile application are receipts from the sale of prewritten computer software. We also conclude that charges for access to Petitioner’s dashboard constitute the sale of prewritten computer software, because the dashboard provides online tools to view, track and manage all of the data about the distributorship and its downline.

The personal website is also software, because it enables distributors to give presentations using a mobile device and to manage their shopping cart and online sponsoring. It is not clear from the petition whether the website software is customized to the specifications of a particular distributor. However, “when tangible personal property, composed of taxable and exempt items is sold as a single unit, the tax shall be collected on the total price.” 20 NYCRR 527.1(b); See Matter of Strata Skin Sciences, Tax Appeals Tribunal, May 5, 2022. Accordingly, when Petitioner charges a distributor one price for the use of the mobile application software, dashboard and personal website, the entire charge is subject to New York State and local sales tax if the distributor is located in New York.

DATED: October 8, 2024

MARY ELLEN LADOUCEUR
Principal Attorney

Note: An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.