Must a direct sales/multi-level marketing company collect and remit Texas state and local sales tax on the sales its independent distributors make, and how should it account for local tax rates that vary by distributor location?

Plain-English summary

A direct sales organization asked the Comptroller to confirm that it, rather than its individual independent distributors, would be responsible for collecting and remitting Texas state and local sales/use tax on taxable sales its distributors made in Texas, and it proposed a specific method for accounting for varying local tax rates.

The Comptroller confirmed this is not optional or something the company needs to opt into: Rule 3.286 has a long-standing requirement that all direct sales organizations collect and remit sales/use tax on their distributors' Texas sales, tied to Tax Code § 151.024, because it's more administratively efficient than trying to collect from thousands of individual distributors. No notification or special agreement with the Comptroller is needed — the obligation is automatic. The Comptroller reviewed the company's proposed method and found it complied with Rule 3.286.

The letter also walks through the mechanics: Texas state sales/use tax was 6.25%, plus up to four layers of local tax (city 1-2%, county up to 0.5%, special-purpose districts 0.125-1%, and eight transit authorities at 0.25-1%). Two accounting methods were suggested depending on business model:

• If distributors take orders before purchasing from the company, the order form should show the tax due and which local jurisdiction it belongs to, and the company collects/remits from copies of those orders.
• If distributors buy inventory before taking customer orders, the company collects/remits based on the suggested retail price and the distributor's own local tax rate, using periodic distributor sales reports (including any exempt out-of-state shipments).

Separately, all items sold to a distributor for their own personal or business use (products for personal use, sales aids, prizes given to customers) are taxed at the company's actual price to the distributor, at the distributor's local rate.

What this means for you

Direct sales and MLM companies

You cannot avoid sales tax collection responsibility by treating your distributors as independent retailers who handle their own tax — Rule 3.286 puts that duty on the parent organization by default, with no need for a formal agreement with the Comptroller. Build your order/reporting systems to capture each sale's local taxing jurisdiction from the start.

Independent distributors

Because your parent company is responsible for collecting and remitting tax on your sales, you generally shouldn't be separately registering to collect tax on those same sales — but items you buy from the company for your own use are taxed as a purchase, not treated as inventory for resale.

Accountants and tax professionals

Note the layered local-rate structure described (city, county, special-purpose district, and transit authority taxes), and the two accepted accounting methods depending on whether the distributor takes orders before or after acquiring inventory from the company. Rule 3.286 subsections (a)(1)(D), (a)(3), and (b)(3) govern seller/purchaser responsibilities in this context.

Common questions

Q: Does a direct sales company need Comptroller approval before collecting tax on distributors' behalf?
A: No — Rule 3.286 makes this an automatic, long-standing obligation; no notification or special agreement is required, though the Comptroller may review a proposed collection method as it did here.

Q: How should local tax be tracked when rates differ by distributor location?
A: The ruling describes two methods tied to business model (pre-order vs. pre-purchase of inventory), both requiring the company to allocate collected tax to the correct local jurisdiction based on the distributor's location.

Q: Are items a distributor buys for their own use treated as tax-free inventory?
A: No — sales aids, prizes for customers, and products for the distributor's personal or business use are taxed on the company's actual price to the distributor, at the distributor's local rate.

Q: Can another direct sales company rely on this letter?
A: No. It confirms one company's proposed method complied with Rule 3.286 and is not a substitute for reviewing your own company's specific facts with the Comptroller or a tax professional.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286 (Seller's and Purchaser's Responsibilities), subsections (a)(1)(D), (a)(3), (b)(3)
• Tex. Tax Code § 151.024 (Direct Sales Organizations)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107395L

Original ruling text

July 31, 2001

Dear **:

Thank you for your letter and our recent phone conversation requesting that
** (COMPANY), a direct sales organization, be responsible for the
collection and remittance of state and local sales or use taxes on taxable
sales made by it's independent distributors located in Texas.

Cristina Chavez in our Account Maintenance Division should be contacting you
shortly regarding the sales tax payment that was submitted. Ms. Chavez can be
reached by phone at 512/463-4822.

I am pleased that COMPANY wishes to collect and remit sales and use taxes on
taxable sales made by it's independent distributors. As I stated on the phone,
the Texas Comptroller has a long-standing policy in an administrative rule
(Rule 3.286) that requires all direct sales organizations to do so because of
the efficient administration of sales and use taxes (See also Tax Code Section
151.024). For that reason, the Comptroller's office does not have to notify or
enter into special agreements with direct sales organizations. However, I have
reviewed COMPANY'S proposed method for the collection and remittance of state
and local sales and use taxes and I can say that the proposed method complies
with the requirements of Rule 3.286. The following is useful information on
direct sales organizations:

A direct sales organization is responsible for collecting and remitting sales
and use tax on Texas sales 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.

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 corporation to
obtain a Texas sales and use tax permit and the booklet 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 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

cc: **
Philip Knisely
Cristina Chavez