Does a multi-level marketing company or its independent distributors have to collect and remit Texas sales and use tax on distributor sales?

Plain-English summary

An independent distributor of a direct-sales/multi-level-marketing company had asked the Comptroller about getting its own Texas sales tax permit to sell the company's products. The Comptroller's answer: distributors don't get their own permit, because Texas Tax Code § 151.024 treats the direct sales company itself — not the individual distributor — as the retailer legally responsible for collecting and remitting state and local sales and use tax on Texas sales made through its distributor network. That responsibility is confirmed in Comptroller Rule 3.286 (Seller's and Purchaser's Responsibilities) and was previously litigated in Administrative Hearing No. 37,308.

Because Texas has four possible layers of local tax on top of the 6.25% state rate — city (1%-2%), county (up to 0.5%), special-purpose district (0.125%-1%), and one of eight local transit authorities (Austin/Dallas/Houston at 1%; San Antonio/Fort Worth/Corpus Christi/El Paso at 0.5%; Laredo at 0.25%) — the letter lays out two accepted bookkeeping methods for a direct sales company to actually calculate and remit the right local tax:

1. Distributor takes the order first, then buys from the company: the order form itself should show the tax due and which local jurisdictions it belongs to, and the company remits based on copies of those orders.
2. Distributor buys inventory first, then takes customer orders: the company collects and remits tax up front based on the suggested retail price and the tax rate at the distributor's own location, and distributors later report actual sales by jurisdiction (including no-local-tax areas and exempt out-of-state shipments) so the company's return reconciles the estimate against actual sales. Any excess collected from a distributor must be refunded or credited.

Separately, any product a distributor buys for personal or business use (not resale) — including sales aids and prizes given to customers — is taxed on the company's actual price to the distributor, at the distributor's own local rate.

What this means for you

Direct sales / MLM companies

You are the retailer of record for Texas sales tax purposes on every sale your distributors make in Texas — your distributors cannot obtain their own sales tax permits to sell your products, and you must register, collect, and remit both state and all applicable local taxes on those sales.

Independent distributors

You don't need (and won't be issued) a separate Texas sales tax permit to sell your company's products; the company handles registration, collection, and remittance. But if you buy products for your own personal or business use — not for resale — tax applies to that purchase at your own location's rate.

Accountants and tax professionals

The letter is most useful for its two accepted local-tax-allocation methods when a distributor network spans multiple local jurisdictions with different rate combinations. Note the reconciliation/refund mechanic in the "buy first" model — any local tax over-collected from a distributor based on the estimated retail price must be refunded or credited once actual sales-by-jurisdiction reporting comes in.

Common questions

Q: Can an independent distributor get their own Texas sales tax permit?
A: No. Under Tax Code § 151.024, the direct sales organization — not the distributor — is the retailer responsible for collecting and remitting tax, so distributors are not issued permits to sell the company's products.

Q: How does the company know which local taxes to collect when distributors are spread across the state?
A: The letter describes two methods: (1) if the distributor takes the order before buying from the company, the order form documents the tax and jurisdiction; (2) if the distributor buys inventory before taking orders, the company collects tax up front based on the distributor's location and reconciles later against the distributor's actual sales reports.

Q: Are sales aids and prizes given to distributors taxed?
A: Yes. Any items sold to a distributor for personal or business use — including sales aids and customer prizes — are taxed on the company's actual price to the distributor at the tax rate for the distributor's location.

Q: Does this letter apply to every MLM or direct sales company in Texas?
A: This specific letter is a STAR letter ruling binding on the Comptroller only as to the taxpayer it was issued to (34 Tex. Admin. Code Rules 3.1, 3.10). But its core holding — that § 151.024 makes the company, not the distributor, the retailer — reflects the statute itself and applies broadly; confirm your own facts with a tax professional.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.024 (direct sales organization is the retailer responsible for tax collection/remittance)
• Comptroller Rule 3.286(a)(1)(D), (a)(3), (b)(3) (Seller's and Purchaser's Responsibilities)
• Administrative Hearing No. 37,308 (STAR document 200002391H) (direct sales organization tax collection/remittance responsibilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200105249L

Original ruling text

May 23, 2001

Dear **:

We recently had a request from one of your independent distributors regarding
obtaining a Texas sales tax permit to sell COMPANY products. Please be aware
that the State of Texas regards the direct sales company, rather than the
distributor, as the retailer responsible for collection and remittance of state
and local sales or use taxes. See Texas Tax Code Section 151.024.

All direct sales organizations, including COMPANY, are responsible for the
collection and remittance of sales and use tax on Texas sales made by their
independent distributors. Please see subsections (a)(1)(D), (a)(3), and (b)(3)
of enclosed Rule 3.286 on Seller's and Purchaser's Responsibilities.
Therefore, the independent distributors of direct sales organizations are not
issued sales tax permits to sell the direct sales organization's products. I
have also enclosed a copy of Administrative Hearing 37,308 (STAR document
200002391H) that ruled on the tax collection and remittance responsibilities of
a direct sales organization.

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 information. An application packet for your company to
obtain a Texas sales and use tax permit and the booklet is enclosed.

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 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.

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

c: **