Who had to collect and report Texas state and local sales tax on retail sales made by a Utah network-marketing company's independent distributors?

Plain-English summary

CORP A, a Provo, Utah network-marketing company, sold through independent distributors in Texas. Under Rule 3.286(a)(3), the Comptroller said CORP A—not each distributor—was responsible for collecting and reporting sales and use tax on the distributors' Texas retail sales.

If a distributor took a customer order before buying from CORP A, the order form should show the tax and local jurisdictions, and CORP A should accrue the tax from copies of those orders.

If the distributor bought inventory before receiving the customer order, CORP A should collect tax based on the retail price and the rate at the distributor's location. Distributors should periodically report sales by local jurisdiction, sales in no-local-tax areas, and exempt sales so CORP A could compile its return. Tax collected from distributors but not due should be returned under Rule 3.325(b).

Products, sales aids, customer prizes, and other items bought for a distributor's personal or business use were taxed on CORP A's sales price to the distributor using the rate at the distributor's location.

The letter listed state and local rates in effect in July 1991. Those historical percentages should not be used as current rates.

What this means for you

A direct-sales organization's collection duty covered retail sales made through independent distributors. The operational method changed with the order flow, but the organization still had to capture the retail price and the correct local allocation.

Common questions

Who filed and remitted the tax? CORP A, the direct-sales organization.

What if the distributor took the order first? The order should identify the tax and local jurisdictions for CORP A's accrual.

What if the distributor stocked the item first? CORP A used the retail price and tax rate at the distributor's location, supported by distributor reports.

How were sales aids or prizes for distributor use taxed? On CORP A's price to the distributor at the distributor's location.

Citations and references

• 34 Tex. Admin. Code Rule 3.286(a)(3) — direct-sales organization responsibility
• 34 Tex. Admin. Code Rule 3.325(b) — return of collected tax that was not due

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1119E10

Original ruling text

July 9, 1991

Dear **:

Thank you for your letter dated June 19, 1991 regarding the tax
responsibilities of direct sales organizations.

You specifically asked about independent distributors of the
network marketing organization CORP A which is based in Provo,
Utah.

CORP A, as a direct sales organization, is responsible for col-
lecting and reporting sales and use tax on Texas sales made by
its distributors. Please see section (a)(3) of the enclosed
Rule 3.286.

The current sales and use tax rate is 6 1/4% and there are
three 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. In addition, there are currently
seven transit areas that have varying sales and use tax rates---
Dallas, Houston, and San Antonio at 1%; Austin at 3/4%; and Fort
Worth, Corpus Christi, and El Paso at 1/2%. Several local
jurisdictions (cities and counties) impose a 1/2% special purpose
district sales and use tax. Please refer to the enclosed
brochure, "Sales Tax Rates in Texas" for further information.

I suggest the following methods for accounting for local taxes
which are due:

If a 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.
CORP A in turn should accrue the appropriate taxes from the
copies of the orders.

If the distributor purchases the items before the customer's
order is taken, CORP A 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. CORP A's
sales tax return should reflect the compilation of these
reports and the regular sales for that reporting period. Any
amounts of tax CORP A collect 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 CORP A's sales price to the
distributor and at the rate of tax for the distributor's location.
Examples of these items include each distributor's products, sales
aids, and prizes awarded to customers.

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

If you have questions or need more information, please call
me toll-free at 1-800-531-5441, extension 5-0330. The regular
number is 512/463-4600, or write Tax Administration Division

Sincerely,

Bettie U. Peterson
Tax Administration Division