Is a direct sales/multi-level marketing company treated as the seller of the products its independent distributors sell, responsible for collecting and remitting Texas sales and use tax?

Plain-English summary

A direct sales organization wrote to the Comptroller after being told that it, not its independent distributors, is considered the seller of the products it furnishes to those distributors — meaning the company is responsible for collecting and remitting sales and use tax. The company's letter suggested it had been singled out.

The Comptroller's response clarified that the company was not being treated differently from any other direct sales organization: all direct sales organizations must be responsible for remitting sales and use tax in this manner, as previously explained in a March 17, 1994 letter. The authority for this position is Texas Tax Code Section 151.024, which lets the Comptroller treat a salesman, representative, peddler, or canvasser as the agent of the dealer, distributor, supervisor, or employer under whom they operate (or from whom they obtain the goods they sell) — and, correspondingly, treat that dealer, distributor, supervisor, or employer as the retailer or seller for tax purposes, whether or not the salesman is selling on their own behalf or for the company.

This statute applies where the seller uses commissioned agents or operates under a "buy/sell" arrangement, and that buy/sell arrangement is why tax must be collected based on the retail price, using the local tax rate where the distributor is located. To ease the collection and allocation burden, the Comptroller pointed the company to Rules 3.374 and 3.375 (city sales and use tax collection and allocation) and Rule 3.425 (MTA use tax collection and allocation), specifically Rule 3.374(b), (e), (f), and (g); Rule 3.375(b); and Rule 3.425(a)(2)(B) and (b).

The letter notes this opinion is based on the facts presented, and could change if the facts differ.

What this means for you

Direct sales / multi-level marketing companies

If you operate a direct sales or MLM business and furnish products to independent distributors who resell them, expect the Comptroller to treat your company — not the individual distributor — as the seller for Texas sales and use tax purposes under Texas Tax Code Section 151.024. That means your company is responsible for collecting and remitting tax on the retail price of the goods sold, calculated using the local tax rate applicable where each distributor is located.

Independent distributors

Under this framework, you are treated as an agent of the direct sales company rather than as the taxable seller yourself, so the collection and remittance obligation falls on the company that supplies your products, not on you individually.

Accountants and tax professionals

This letter confirms the Comptroller applies Texas Tax Code Section 151.024 uniformly to direct sales organizations using commissioned agents or buy/sell arrangements — it is not a company-specific position. Rules 3.374, 3.375, and 3.425 provide the mechanics for collecting and allocating local (city and MTA) sales and use tax based on the distributor's location.

Common questions

Q: Who is considered the "seller" when a direct sales company furnishes products to independent distributors?
A: The direct sales/MLM company itself is considered the seller of the products it furnishes to its independent distributors, not the distributors.

Q: Was this company singled out for special treatment?
A: No. The Comptroller stated that all direct sales organizations are required to be responsible for remittance of sales and use taxes in this manner, consistent with a prior March 17, 1994 letter.

Q: What is the legal basis for treating the company as the seller?
A: Texas Tax Code Section 151.024, which allows the Comptroller to regard a salesman, representative, peddler, or canvasser as the agent of the dealer, distributor, supervisor, or employer, and to regard that dealer, distributor, supervisor, or employer as the retailer or seller for tax purposes.

Q: How is the local sales and use tax rate determined under a buy/sell arrangement?
A: Tax is collected based on the retail price, using the local tax rate applicable where the distributor is located.

Q: What guidance is available for collecting and allocating the local tax?
A: The Comptroller pointed to Rule 3.374 (city sales and use tax collection and allocation), Rule 3.375, and Rule 3.425 (MTA use tax collection and allocation) — specifically Rule 3.374(b), (e), (f), and (g); Rule 3.375(b); and Rule 3.425(a)(2)(B) and (b).

Citations and references

• Texas Tax Code Section 151.024 (agent/retailer status of salesmen, representatives, peddlers, or canvassers)
• Rule 3.374(b), (e), (f), and (g) (city sales and use tax collection and allocation)
• Rule 3.375(b) (city sales and use tax collection and allocation)
• Rule 3.425(a)(2)(B) and (b) (MTA use tax collection and allocation)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9411L1327D07

Original ruling text

November 23, 1994

Dear **:

Thank you for your letter of October 18, 1994, concerning the Comptroller's
position that *** is considered the seller of the products it
furnishes to its independent distributors.

Your company has not been singled out for special treatment. The Comptroller
requires all direct sales organizations to be responsible for the remittance of
sales and use taxes in the manner described in my letter of March 17, 1994. This
authority is found in Texas Tax Code Section 151.024 states:

If the comptroller determines that it is necessary for the efficient
administration of this chapter to regard a salesman, representative,
peddler, or canvasser as the agent of a dealer, distributor, supervisor, or
employer under whom he operates or from whom he obtains the tangible
personal property that he sells, whether or not the sale is made in his own
behalf or for the dealer, distributor, supervisor, or employer, the
comptroller may so regard the salesman, representative, peddler, or
canvasser, and may regard the dealer, distributor, supervisor, or employer
as a retailer or seller for the purpose of this chapter.

The above statutory provision is applied in cases where the seller uses
commissioned agents or operates under a "buy/sell" arrangement. This buy/sell
arrangement is contemplated in requiring tax to be collected based on the retail
price based on the local tax rate where the distributor is located.

The recommended procedures for collecting local sales and use tax eases the
collection and allocation responsibilities. Enclosed are Rules 3.374 and 3.375
concerning city sales and use tax collection and allocation and Rule and 3.425
concerning MTA use tax collection and allocation. See Rule 3.374(b), (e), (f),
and (g); Rule 3.375(b); and Rule 3.425(a)(2)(B) and (b).

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

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

NOTE: Previous Accession Number 9411770L