Is a multi-level marketing company required to hold a Texas sales tax permit and collect state and local sales tax on the sales its distributors make, and how should it account for local tax across different jurisdictions?

Plain-English summary

The Texas Comptroller confirmed that a multi-level marketing (MLM) company is a "direct sales organization" responsible for collecting and remitting Texas sales and use tax — including all applicable local taxes — on taxable sales made by its distributors. This duty belongs to the company itself under 34 TAC Rule 3.286, not to the individual distributors.

The letter lays out the local-tax landscape as of 2000: a 6.25% state rate, plus up to four layers of local tax depending on location — city (1% to 2%), county (up to 0.5% for property tax relief), special purpose district (0.125% to 1%), and transit authority (varying rates in eight areas: Austin, Dallas, and Houston at 1%; San Antonio, Fort Worth, Corpus Christi, and El Paso at 0.5%; Laredo at 0.25%). The Comptroller suggests two accounting methods depending on whether the distributor takes customer orders before or after purchasing inventory from the company, and confirms the company must true up local-tax collection based on its internal distributor sales reports.

The letter also flags that some product categories are entirely exempt regardless of the MLM/local-tax analysis — water, food products, and (effective April 1, 2000) over-the-counter drugs, vitamins, minerals, and nutritional supplements for human consumption.

What this means for you

Multi-level marketing and direct-sales companies

If you run a direct sales/MLM operation in Texas, you — not your individual distributors — are responsible for holding a sales tax permit and collecting/remitting state and local tax on your distributors' taxable Texas sales. You need a system (order-based or sales-report-based) to allocate local tax correctly by the customer's jurisdiction, and you must refund or credit any over-collected tax back to distributors.

Distributors

If your MLM company tells you it's the one responsible for tax collection and reporting rather than you individually, that's consistent with this ruling — the collection duty runs through the direct sales organization, not each distributor.

Accountants and tax professionals

Watch the two accounting methods described: (1) if the distributor takes orders before purchasing from the company, tax should be computed and allocated per-order at the time of sale; (2) if the distributor buys inventory before customers order, tax is computed on the suggested retail price at the distributor's own local rate, with periodic sales reports reconciling actual local-jurisdiction sales. Also confirm whether the products sold fall into an outright exemption category (food, water, or — as of April 1, 2000 — OTC drugs/vitamins/minerals/nutritional supplements) before applying the general MLM collection framework.

Common questions

Q: Who is responsible for collecting sales tax in a multi-level marketing business — the company or the distributor?
A: The direct sales organization (the MLM company) is responsible for collecting and remitting sales and use tax on Texas sales of taxable items made by its distributors, under 34 TAC Rule 3.286.

Q: How many layers of local sales tax can apply to a single Texas transaction?
A: Up to four: city (1%–2%), county (up to 0.5%), special purpose district (0.125%–1%), and transit authority (varying rate in eight specific transit areas), on top of the 6.25% state rate.

Q: If some multi-level marketing companies aren't collecting tax, does that mean it's optional?
A: No. The letter notes that if a company appears not to be collecting tax, it may simply be selling products that are independently exempt (like water, food, or OTC drugs/vitamins/supplements as of April 1, 2000) — not that collection is optional for a taxable product. The Comptroller also invites reports of noncompliant companies.

Q: Can I rely on this letter for my own MLM business?
A: No. This letter is binding only on the Comptroller for the taxpayer it was issued to and is based on the facts that taxpayer presented; other facts, though similar, may yield different results.

Citations and references

Rules:

• 34 TAC Rule 3.286, subsections (a)(1)(D), (a)(3), (b)(3) (Seller's and Purchaser's Responsibilities — direct sales organization collection duty)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005301L

Original ruling text

May 16, 2000

Dear **:

Thank you for your letter as to why ** Corporation, as a
multi-level marketing company, is required to hold a Texas sales tax permit and
collect sales or use taxes. Some of your distributors have told you that other
multi-level marketing companies are not collecting tax on their purchases.

A direct sales organization is responsible for collecting and remitting sales
and use tax on Texas sales of taxable items made by its distributors. Please
see subsections (a)(1)(D), (a)(3), and (b)(3) of enclosed Rule 3.286 on
Seller's and Purchaser's Responsibilities. If you have specific information
(company name, address, etc.) on any direct sales organization that is not in
compliance with Rule 3.286, we will be happy to receive the information and
bring that company into compliance.

The current state sales and use tax rate is 6 1/4% and there are four types of
local sales and use taxes that may be due on a transaction. The city rate is
1% to 2% for those Texas cities imposing the city sales and use tax. Many
counties also impose a 1/2% county sales and use tax for property tax relief.
Several local jurisdictions (including some counties) impose a 1/8% to 1%
special purpose district sales and use tax. In addition, there are currently
eight transit areas that have varying sales and use tax rates---Austin, Dallas,
and Houston at 1%; San Antonio, Fort Worth, Corpus Christi, and El Paso at
1/2%; Laredo at 1/4%. Please refer to the booklet, Texas Sales and Use Tax
Rates for further local tax rate information. A copy has been mailed under
separate cover.

We suggest the following methods for accounting for local taxes that are due:

If the distributor takes orders before purchasing from the company, the order
blank should indicate the amount of tax due and to which local taxing
jurisdictions it should be allocated. The direct sales organization should
collect and remit the appropriate taxes from copies of the orders.

If the distributor purchases the items before the customer's order is taken,
the direct sales organization should collect and remit the amount of tax based
on the suggested retail sales price and the tax rate in effect for the
distributor's location. Periodically, distributors should submit reports to
the direct sales organization indicating the amount of sales in each local
taxing jurisdiction, the amount of sales in areas having no local taxes, and
any exempt sales such as products shipped by the distributor to customers
outside Texas. The direct sales organization's sales tax return should reflect
the compilation of these internal reports and the regular sales for that
reporting period. Any amount of tax the direct sales organization collects
from distributors which is not due should be refunded or credited to them.

All sales of taxable items to a distributor for personal or business use should
have tax computed on the direct sales organization's actual price to the
distributor and at the rate of tax for the distributor's location. Examples of
these items include products for the distributors own use, sales aids, and
prizes given away to customers.

I do not know what products you sell. Some items, such as water and food
products, are simply exempt from sales tax. Effective April 1, 2000, Texas
exempted the sale of over-the-counter drugs and medicines. The exemption
includes all sales of vitamins, minerals, and nutritional supplements for human
consumption. If your company sells vitamins, minerals, and nutritional
supplements and is still collecting tax, that would explain the comments by
your distributors.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division