Can 'Direct' distributors in a direct-sales organization get their own sales tax permits, and how do they handle tax on non-company items like tapes, books, and business tools?

Subject

Direct Sales Distributors Allowed To Obtain Sales Tax Permits For Non-Company Tools And Items

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9309L1282A14

Plain-English Summary

This letter confirms the Comptroller's "reconsideration" of the sales tax reporting responsibilities of a direct-sales organization ("Company A") and its distributors. Company A's distributors sell the company's main product line and also sell an "extensive line of cassette tapes, books, and business tools that assist distributors in building successful * businesses." The letter is explicit that its guidance applies only to these "non-* tools" — sales of the main product line "should be handle in the same manner as in the past."

The first question was whether "Direct" distributors — those who have reached a level where both the company and the organization recognize them as "successful, permanent businesses" — should be allowed to obtain their own sales tax permits and report tax on their sales. Some Directs already held permits; others had been denied. After checking with the Assistant Director of Tax Administration and confirming with the Audit Division that no reporting problems had occurred with Directs who already held permits, the Comptroller decided to allow any Direct to obtain a permit and report the tax. Field offices were to be notified, and the organization was told it could freely copy the letter to help Directs obtain permits. The letter notes the arrangement is meant to be "self-policing": Directs should only sell tax-free to other Directs below them in the distribution chain, and resale certificates should be obtained from each person to whom tax-free sales are made.

The letter also resolves three related questions: (1) handling charges are taxable when tied to a sale of taxable items, with tax due on the sales price plus handling charges to the final consumer; (2) local tax is sourced to the jurisdiction where each Direct has its place of business, and a "non-Direct" who resells to another "non-Direct" at a lower rate may file for a refund with the Direct; and (3) tax-free purchases a Direct makes for their own use must be reported as purchases for own use on the sales tax report, including handling charges, using the report's block for such items. These procedures were to be implemented January 1, 1994.

What This Means For You

If you run or participate in a direct-sales/MLM-style distribution structure in Texas: This letter shows the Comptroller distinguishing between a company's core product (handled under prior, established procedures) and secondary "tools" items like tapes, books, and business-building materials sold within the organization — the new permit-and-reporting guidance here applies only to the latter.

If you are a "Direct"-level distributor: You may be able to obtain your own sales tax permit and report tax directly, rather than relying entirely on someone above you in the chain. Selling tax-free to other Directs below you requires collecting a resale certificate from each such buyer to support the tax-free sale.

If you collect local sales tax as a Direct: Tax is collected at the rate for the jurisdiction where your business is located, and you report all such sales tax revenue as if collected in your own city. A non-Direct who buys from another non-Direct and pays at a higher rate than where they're located can seek a refund from the Direct.

If you buy inventory tax-free but keep some for your own use: That purchase price (including handling charges) needs to be reported as a taxable purchase for your own use on your sales tax report, not left unreported.

Q&A

Q: Does this ruling apply to Company A's main product line?
A: No. The letter states the response is "applicable only to the sale of the 'non-* tools'" (cassette tapes, books, and business tools) and that "sales of * should be handle in the same manner as in the past."

Q: Can "Direct" distributors get their own sales tax permit?
A: Yes. The letter states "the decision has been made to allow any of the 'Directs' to obtain permits and report the tax," reversing a practice where some Directs had been denied permits.

Q: Are handling charges taxable?
A: Yes, when associated with a sale of taxable items — the letter states "[t]ax will be due on the total of the sales price and the handling charges to the final consumer of the item."

Q: Which local tax rate applies to a Direct's sales?
A: The rate "in effect in the jurisdiction where each 'Direct' has its place of business." Directs report all such sales tax revenue as if collected within their own city, and a non-Direct reselling at a lower rate to another non-Direct may file for a refund with the Direct.

Q: What happens if a Direct buys items tax-free but uses some personally?
A: The purchase price, including handling charges, must be reported on the sales tax report as purchases for their own use, in the report's block for such items.

Original ruling text

September 20, 1993

Dear *****:

The purpose of this letter is to confirm our reconsideration of the
sales tax reporting responsibilities of your organization and clarify
the procedures to be followed.

Company A and its associated distributors sell * and also
sell an "extensive line of cassette tapes, books, and business tools
that assist distributors in building successful * businesses".
Your questions focused on the sale of these "non-* tools". The
response below is applicable only to the sale of the "non-*
tools". Sales of * should be handle in the same manner as
in the past.

Your first question deals with whether your "Direct" distributors
should be allowed to obtain permits and report the tax on their sales
to the state. The "Direct" distributors are folks that have reached a
level at which both * and Company A Enterprises recognize them as
successful, permanent businesses. Apparently, a number of these
distributors have permits, but others have been denied permits when
they applied. I discussed the situation with Wade Anderson, Assistant
Director of Tax Administration, and checked for any past reporting
problems with personnel in our Audit Division. I was pleased to learn
that no such problems have occurred in reference to the "Direct"
distributors that currently hold sales tax permits. As a result, the
decision has been made to allow any of the "Directs" to obtain permits
and report the tax. Our field offices will be notified of this
decision and you may freely copy this letter for aid by the "Directs"
in obtaining permits. As we discussed, the "Directs" will know for
their own protection that they should only sell tax-free to other
"Directs" below them in the distribution chain, so the procedures
should be self-policing. Resale certificates should be obtained from
each person to whom tax-free sales are made.

The second question deals with the taxability of handling charges.
Handling charges are taxable when associated with a sale of taxable
items. Tax will be due on the total of the sales price and the
handling charges to the final consumer of the item.

The next problem is in the area of local taxes. Tax will be collected
based on the rate in effect in the jurisdiction where each "Direct"
has its place of business. Therefore, when "Directs" file their sales
tax reports with the State, they may list all sales tax revenue as if
it were collected within their own city. If a "non-Direct"
subsequently sells to another "non-Direct" and the rate is less, the
"nonDirect" may file for a refund with the "Direct".

The last issue involves tax-free purchases made by the "Directs" for
their own use. In these cases, the purchase price of the items,
including handling charges, should be reported on the sales tax report
as purchases for their own use. The report contains a block where the
total price of all such items may be entered.

The above procedures should be implemented January 1, 1994. Please
feel free to provide a copy of this letter to any of the "Directs" for
help in obtaining a sales tax permit.

I hope that the above information provides all the members of your
organization with the guidance necessary to properly handle the sales
tax responsibilities with a minimum of inconvenience. Your attention
to these matters is commendable. If you have any further questions,
please do not hesitate to call me at 1-800-252-5555 or (512) 463-3939.

Sincerely

Tom Poole
Assistant Manager
Tax Administration

NOTE: Previous Accession Number 9402022L.2 and/or 9402022L