Does a direct sales (multi-level marketing) organization have to collect and remit Texas sales and use tax on the sales its independent distributors make in Texas?

Plain-English summary

A company operating as a direct sales organization — selling taxable items through independent distributors located in Texas — asked (or was informed by) the Comptroller's office about its sales tax collection obligations. The Comptroller's office advised that a direct sales organization is responsible for collecting and remitting Texas sales and use tax on the taxable sales its distributors make in Texas, pointing to section (a)(3) of Rule 3.286.

The letter walks through the tax rates in effect at the time: a state rate of 6 1/4%, plus up to four types of local tax that could apply to a given sale — city sales and use tax (1% to 2% in cities that impose it), a 1/2% county sales and use tax that many counties impose for property tax relief, a 1/2% to 1% special purpose district tax in some local jurisdictions, and transit authority taxes in eight transit areas (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%).

The Comptroller's office suggested two accounting methods depending on when the sale occurs relative to the distributor's own purchase from the company. If the distributor takes the customer's order before purchasing from the company, the order form should show the tax due and the local jurisdictions to which it should be allocated, and the direct sales organization should collect and remit based on copies of those orders. If the distributor purchases the items before the customer's order is taken, the direct sales organization should collect and remit tax based on the retail sales price and the rate in effect at the distributor's location, using periodic reports from distributors on sales by local jurisdiction, sales in areas with no local tax, and exempt sales; any tax collected from distributors that was not actually due should be refunded to them per Rule 3.325(b). The letter also notes that all items sold to a distributor for the distributor's own personal or business use — such as products for the distributor's use, sales aids, and prizes awarded to customers — are taxed based on the direct sales organization's sales price to the distributor and the rate at the distributor's location.

What this means for you

Direct sales / multi-level marketing companies

If you sell taxable items in Texas through a network of independent distributors, you — not the individual distributors — are generally responsible for collecting and remitting Texas sales and use tax on those sales. You'll need a Texas sales and use tax permit, and you should apply both the state rate and any applicable local taxes (city, county, special purpose district, and transit authority) based on the distributor's or customer's location.

Accountants and tax professionals advising MLM/direct sales clients

This letter illustrates the Comptroller's two accepted methods for tracking and remitting local tax depending on order timing: (1) order-first method, where the order form itself documents the tax and local jurisdiction allocation, and (2) purchase-first method, where distributors periodically report sales by local jurisdiction (including exempt sales and no-local-tax sales) so the organization's return reflects the compiled totals. It also confirms that items given to distributors for their own use (sales aids, prizes, personal-use products) are taxed on the organization's sale price to the distributor, not on any later transaction.

Common questions

Q: Who is responsible for collecting Texas sales tax on sales made by independent distributors of a direct sales company?
A: The direct sales organization itself, not the individual distributors — the Comptroller's office confirmed this responsibility, citing Rule 3.286(a)(3).

Q: What local taxes might apply in addition to the state sales tax rate?
A: Up to four types depending on location: city sales and use tax (1%-2%), a county sales and use tax (typically 1/2%, for property tax relief), special purpose district taxes (1/2%-1%), and transit authority taxes in areas like Dallas, Houston, San Antonio, Austin, Fort Worth, Corpus Christi, El Paso, and Laredo.

Q: How should local tax be tracked if a distributor takes an order before purchasing from the company?
A: The order blank should indicate the tax due and the local taxing jurisdiction(s) it belongs to, and the direct sales organization should collect and remit based on copies of those orders.

Q: How should local tax be tracked if the distributor buys inventory before taking the customer's order?
A: The organization should collect and remit tax based on the retail sales price and the distributor's local rate, using periodic distributor reports on sales by jurisdiction (including no-tax and exempt sales), and refund any excess tax collected per Rule 3.325(b).

Q: Are items given to distributors for their own use taxable?
A: Yes. Products for the distributor's own use, sales aids, and prizes awarded to customers are taxed based on the direct sales organization's sales price to the distributor and the tax rate at the distributor's location.

Citations and references

• Rule 3.286(a)(3) — direct sales organization's responsibility to collect and remit tax on distributor sales.
• Rule 3.325(b) — refund of tax collected from distributors that was not actually 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/9412L1330E10

Original ruling text

December 16, 1994

Dear *****:

It has recently come to our attention that ***** is a direct sales
organization making taxable 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. 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 1/2% 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 me toll free at 1-800-531-5441, ext. . The direct line is 512/463-4683 .
You may also write to Tax Administration, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

NOTE: Previous Accession Number 9412825L