Does a direct sales (multi-level marketing) organization, rather than its independent Texas distributors, have to collect and remit Texas sales and use tax on sales made through those distributors?

Plain-English summary

The Comptroller's office learned that a company operates as a direct sales organization, selling taxable items in Texas through independent distributors. The Comptroller wrote to the company to explain how sales and use tax collection responsibility works for this kind of business.

A direct sales organization — not its individual distributors — is responsible for collecting and remitting Texas sales and use tax on sales its distributors make in Texas. Because of this, the Comptroller's office will not issue Texas sales tax permits to the company's distributors, and will cancel permits already issued to them, per Rule 3.286(a)(3) (enclosed with the letter).

The letter lays out the tax rates that can apply to a transaction: the state rate of 6 1/4%, city rates of 1% to 2% in cities that impose a local sales tax, a county rate of up to 1/2% in many counties (for property tax relief), special purpose district rates of 1/2% to 1% in some local jurisdictions, and transit authority rates that varied by city at the time — 1% in Dallas, Houston, and San Antonio; 3/4% in Austin; 1/2% in Fort Worth, Corpus Christi, and El Paso; and 1/4% in Laredo.

The letter then describes two acceptable methods for the organization to compute and remit local tax, depending on how a sale is made:

• If a distributor takes a customer's order before purchasing the item from the company, the order form should show the tax due and which local jurisdiction it belongs to, and the organization should collect and remit tax based on those order copies.
• If a distributor buys the item before taking the customer's order, the organization should collect and remit tax based on the retail sales price and the tax rate for the distributor's location, using periodic reports from distributors on sales by jurisdiction (including any sales in no-local-tax areas or to exempt entities). Any tax collected from a distributor that was not actually due should be returned to the distributor per Rule 3.325(b).

Separately, all sales of items to a distributor for the distributor's own personal or business use (such as products for the distributor's own use, sales aids, or prizes given to customers) are taxed based on the organization's sales price to the distributor, at the distributor's local tax rate.

What this means for you

Direct sales / multi-level marketing companies

If your company sells through independent distributors in Texas, your company — not the distributors — bears the responsibility for collecting and remitting state and local sales/use tax on those sales. Don't rely on distributors to hold their own Texas sales tax permits; the Comptroller's office will not issue permits to them and will cancel any they already have.

Independent distributors

If you sell for a direct sales/MLM organization in Texas, you generally are not expected to register for or hold your own Texas sales tax permit for these sales — that responsibility sits with the parent organization, which should be collecting and remitting the tax on your sales.

Accountants and tax professionals

This letter is useful for understanding the Comptroller's expected recordkeeping approach for MLM-style sellers: track whether the distributor takes the order before or after purchasing the item from the company, since that determines whether local tax is computed off order-blank data or off periodic distributor sales reports keyed to the distributor's local jurisdiction.

Common questions

Q: Who is responsible for collecting Texas sales tax on MLM/direct sales — the company or the distributor?
A: The direct sales organization (the company) is responsible for collecting and remitting sales and use tax on Texas sales made through its distributors, not the individual distributors.

Q: Can a distributor for a direct sales organization get their own Texas sales tax permit?
A: No. The Comptroller's office will not issue permits to a direct sales organization's Texas distributors and will cancel any permits already issued to them.

Q: How should local tax be calculated when a distributor takes an order before buying the item from the company?
A: The order blank should show the tax due and the local jurisdiction it belongs to, and the organization should collect and remit tax based on copies of those orders.

Q: How should local tax be calculated when a distributor buys the item before the customer orders it?
A: Tax should be computed on the retail sales price using the tax rate in effect for the distributor's location, with distributors periodically reporting sales by jurisdiction (including no-local-tax sales and exempt sales) so the organization's return reflects the compiled totals.

Q: Is tax due on items a distributor buys for their own use, such as sales aids or prizes?
A: Yes. These are taxed based on the organization's sales price to the distributor, at the tax rate for the distributor's location.

Citations and references

No specific statutes are cited in the text of this letter. The letter references 34 Tex. Admin. Code Rule 3.286(a)(3) (permits for direct sales organizations) and Rule 3.325(b) (both enclosed with the original letter but not otherwise quoted in the text).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9411L1321A13

Original ruling text

November 8, 1994

Dear Taxpayer:

We have received information that ***** is a direct sales
organization making sales of taxable items through independent distributors
located in Texas.

A direct sales organization is responsible for collecting and remitting sales
and use tax on Texas sales made by its distributors. We will not issue permits
to your Texas distributors and we will cancel permits issued to them. Please
see section (a)(3) of the enclosed Rule 3. 286.

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 112% county sales and use tax for property tax relief.
Several local jurisdictions (including some counties) impose a 1/2% 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---Dallas,
Houston, and San Antonio at 1%; Austin at 3/4%; Fort Worth, Corpus Christi, and
El Paso at 1/2%; Laredo at 1/4%. Please refer to the enclosed booklet, "Sales
Tax Rates in Texas" for further information. An application packet for your
corporation to obtain a Texas sales and use tax permit is also included.

We suggest the following methods for accounting for local taxes which 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 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. The direct sales
organization's sales tax return should reflect the compilation of these 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
returned to them as outlined in the enclosed Rule 3.325(b).

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

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call toll free at 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may also write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

NOTE: Previous Accession Number 9411692L