What Texas sales-tax duties arose when an out-of-state direct seller used demonstrators to take orders at Texas home parties?

Plain-English summary

An out-of-state company planned to sell decorator products through home parties, where demonstrators took guest orders and merchandise was shipped to the hostess for distribution. The Comptroller said the company had to collect and report Texas sales and use taxes on sales by its distributors in Texas, whether the distributor lived in Texas or entered Texas for the party.

The letter sourced local tax based on the transaction structure, including customer delivery or the distributor's location, and described reporting methods for orders taken before or after the distributor bought the goods. Its stated 1988 rates are historical and should not be used as current rates.

Free hostess merchandise was not taxable to the hostess, but the retailer owed sales or use tax on its purchase price because the gift was not held for resale. Handling and transportation charges added to Texas sales invoices were part of the taxable sales price.

Common questions

Did Texas home parties create collection duties for the company? Yes.

Was a free hostess gift taxed to the hostess? No, but the retailer owed tax on its cost.

Were handling charges taxable? Yes under the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8812L0921A11

Original ruling text

December 22, 1988

Dear *****:

I am responding to your request for information regarding the responsibilities of and an
application for a sales tax permit to operate your home party business in Texas.

You stated that your company is considering doing business in Texas. The nature of
business is selling decorator products through a network of home parties. Orders are
taken at a party located in the hostess' home by a demonstrator representing the
company. The hostess may be a resident of one state and the demonstrator a resident
of a different state. The party guests ordering the products are the users of the
products. The merchandise ordered is shipped from the company's warehouse in Missouri
to the hostess for distribution to the guests.

I am enclosing an application for a sales tax permit and several rules regarding general
sales tax responsibilities of Texas sellers.

I will restate your specific inquiries and provide a response following each question.

1) Should tax be determined at the rate where the demonstrator lives, where the party is
held, or at the corporation location?

Response: ***** will be responsible for collecting and reporting Texas sales and
use taxes on sales made by its distributors in Texas. Please see Section (a)(3) of the
enclosed Rule 3.286. This will apply whether the distributor is located in Texas or comes
into Texas to hold a home party/demonstration.

The current Texas sales and use tax rate is 6%. There are three types of local taxes that
may be due on a transaction. Texas cities that have elected to impose a local sales and use
tax may do so at a rate of 1% or 1 1/2%. Texas counties may elect to impose a 1/2% county sales
and use tax. Metropolitan Transit Authorities/City Transit Departments (MTA/CTD) may be created
and may impose a sales and use tax with rates varying from 1/4% to 1%. I have enclosed a
brochure providing the various sales tax rates in Texas according to city/county/MTA/CTD.

The total sales and use tax rate collected from the distributor may range from 6% to 8%,
depending on the rate in effect for the location where the customer takes delivery of the
product. We suggest the following methods for accounting for local taxes which are due:

If the distributor takes orders before purchasing from your company, the order blank should
indicate the amount of tax due and to which local taxing jurisdictions it should be allocated.
Your company in turn should accrue the appropriate taxes from the copies of the orders.

If the distributor purchases the goods before the customer's order is taken, your company
should collect and report the amount of tax based on the retail sales price and the tax rate
in effect for the distributor's location. Periodically, the distributors should submit reports
indicating the amount of sales in each local taxing jurisdiction, the amount of sales in areas
having no local taxes and any sales to exempt entities. Your company's return should reflect
the compilation of these reports and the regular sales for that reporting period. Any amount
of tax your company collects from distributors which is not due should be returned to them as
outlined in Rule 3.325(b).

All sales of items to a distributor for personal or business use should have tax computed
on your company's sales price to the distributor and at the rate of tax for the distributor's
location. Examples of these items include your company's products, sales aids, and prizes
awarded to customers.

2) There are sales incentives to the hostess with free merchandise, i.e., if party orders
exceed a specified amount, then the hostess receives a gift free. Should the hostess be
charged sales tax on this"free" item.?

Response: No. Because the item is not for resale, the retailer (*****) owes Texas
sales/use tax on the purchase price of the gifts given to the host/hostesses. This is not
a taxable transaction to the host/hostess since this is a gift, but is a taxable use
to the retailer.

3) Should sales tax be computed on handling charges?

Response: Yes. The taxable sales price for sales in Texas includes the sales price of
the item and any applicable handling and/or transportation charges added to the invoice(s).

Along with the sales tax information, I have enclosed pertinent information for out-of-state
corporations planning to do business in Texas.

This opinion is based on the facts presented. If there are any additional or different
facts, this opinion may change.

You may write Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division