How should a direct sales (multi-level marketing) organization collect and remit Texas sales and use tax on sales its independent distributors make in Texas?

Plain-English summary

The Comptroller's office responded to a March 8, 1995 letter from COMPANY, a direct sales organization that makes taxable sales of products through independent distributors located in Texas. The letter confirms that a direct sales organization — not each individual distributor — is responsible for collecting and remitting Texas sales and use tax on the Texas sales its distributors make, citing section (a)(3) of Rule 3.286.

The letter lays out the tax rates in play: the state rate was 6 1/4%, plus up to four types of local taxes that may apply — 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 1/4% to 1% special purpose district tax imposed by some local jurisdictions, and a transit tax in eight listed transit areas (Dallas and Houston at 1%; Austin at 3/4%; San Antonio, Fort Worth, Corpus Christi, and El Paso at 1/2%; Laredo at 1/4%). The Comptroller enclosed a booklet, "Sales Tax Rates in Texas," and a sales and use tax permit application packet for the company.

The letter then explains two accounting methods depending on how the distributor handles orders. If the distributor takes the customer's order before purchasing from the company, the order blank should show the tax due and which local taxing jurisdiction(s) it belongs to, and the direct sales organization should collect and remit tax based on copies of those orders. If the distributor instead 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 tax rate for the distributor's own location, with distributors periodically reporting sales by local taxing jurisdiction, sales in areas with no local tax, and any exempt sales; the direct sales organization's sales tax return should reflect the compiled reports along with its regular sales for that period. Any tax collected from distributors that turns out not to be due should be returned to them under Rule 3.325(b).

Finally, the letter states that all sales of items 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 — should have tax computed on the direct sales organization's sales price to the distributor, at the tax rate for the distributor's location.

What this means for you

Direct sales and MLM companies operating in Texas

Your organization, not your independent distributors, is legally responsible for collecting and remitting Texas state and local sales and use tax on taxable Texas sales made through those distributors. You'll need a Texas sales and use tax permit, and your accounting approach should track which of the two order-timing scenarios described in the letter applies to each transaction.

Distributors and how orders are timed

If a distributor takes a customer's order before buying the product from the company, the order form itself should capture the tax due and the applicable local jurisdiction, and remittance flows from those order records. If the distributor instead stocks up and sells from inventory, tax should be based on the retail price and the rate at the distributor's own location, with distributors periodically reporting their sales by jurisdiction (including any tax-exempt sales) so the company can compile a single return.

Accountants and tax professionals

Note the layered local rate structure described here — city (1%–2%), county (1/2%), special purpose district (1/4%–1%), and transit authority tax (varying by named metro area) — on top of the 6 1/4% state rate. Also note that items a distributor buys for their own personal or business use (not for resale), including sales aids and prizes given to customers, are taxed on the company's sale price to the distributor at the distributor's local rate, separate from the customer-sale collection rules.

Common questions

Q: Who is responsible for collecting and remitting Texas sales tax on sales made by MLM distributors — the company or the distributor?
A: The direct sales organization (the company) is responsible for collecting and remitting the tax, per section (a)(3) of Rule 3.286, as referenced in this letter.

Q: What tax rate applies to a distributor's sale to a customer?
A: It depends on the order sequence. If the customer orders before the distributor buys from the company, the order blank should show the tax due and the local jurisdiction it belongs to. If the distributor buys inventory before taking the customer's order, tax is based on the retail sales price and the tax rate for the distributor's own location.

Q: How are items a distributor buys for their own use — like sales aids or prizes — taxed?
A: Tax is computed on the direct sales organization's sales price to the distributor, using the tax rate for the distributor's location.

Q: What if the direct sales organization collects tax from a distributor that wasn't actually due?
A: The letter states that excess tax collected from distributors should be returned to them, as outlined in Rule 3.325(b).

Citations and references

• Rule 3.286, section (a)(3) (enclosed with the original letter)
• Rule 3.325(b) (enclosed with the original letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9503141L

Original ruling text

March 15, l995

Dear **:

Thank you for your March 8, 1995, letter regarding COMPANY as a direct sales
organization, will be making taxable sales of products 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 1/4% 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, and Houston
at 1%; Austin at 3/4%; San Antonio, 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. 5-0030. The direct line is
512/475-0030. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Administration Division