When a distributor for a direct sales/multi-level marketing company buys items for their own personal or business use (not for resale) and gets overcharged sales tax on the retail price instead of the company's wholesale price, how do they get a refund?

Plain-English summary

This is a short letter from the Texas Comptroller's Tax Administration Division (signed by Joan Hale) responding to an inquiry about sales tax refund procedures for a direct sales organization/multi-level marketing company and its distributors.

The letter describes how tax collection is supposed to work in this business model: the direct sales organization collects and remits Texas sales and use tax on the sales it makes to its distributors, and normally computes that tax on the retail sales price (i.e., what the distributor will resell the item for). But there's an exception — when a distributor buys an item from the organization for their own personal or business use rather than for resale, tax should instead be computed on the organization's sales price to the distributor (essentially a wholesale price), using the tax rate for the distributor's location.

The catch is that the distributor has to tell the organization which items are for their own use, since the organization otherwise has no way to know. If the distributor doesn't do this and ends up being charged tax on the higher retail price when the lower own-use basis should have applied, the distributor can ask the direct sales organization for a refund of the overpaid tax. The distributor needs to identify which items were overtaxed — for example, by sending a copy of the invoice with the relevant items marked.

Once the organization refunds the tax to the distributor directly, or (with the distributor's written consent) credits it to the distributor's account, the organization can recover that amount itself by taking a credit on its next sales and use tax return, or by seeking reimbursement under the procedures in subsection (a) of Rule 3.325. The letter also references Rule 3.338 as enclosed but doesn't describe its contents.

What this means for you

Direct sales organizations / multi-level marketing companies

When you sell to your own distributors, tax is generally due on the retail sales price — except for items a distributor is buying for their own personal or business use rather than for resale, where tax should be based on your sales price to the distributor (not the retail price), sourced to the distributor's local tax rate. Because you generally can't tell which items are for resale versus own-use without being told, you need a process for distributors to flag own-use purchases up front, and a refund process for when they don't.

Distributors who buy from a direct sales organization for personal or business use

If you're charged tax on the full retail price for items you're actually keeping for yourself (not reselling), you may have overpaid. You can seek a refund directly from the direct sales organization — identify the specific items involved, for example by sending a marked-up copy of your invoice, so the organization can verify the overpayment and refund or credit you.

Accountants and tax professionals advising direct sales organizations

After refunding or crediting a distributor's overpaid tax, the organization doesn't need to separately petition the Comptroller — it can recover that amount by taking a credit on its next sales and use tax return, or by seeking reimbursement under Rule 3.325(a). Rule 3.338 is also referenced as relevant to this area and should be reviewed alongside Rule 3.325.

Common questions

Q: Does a direct sales organization always compute tax on the retail sales price when selling to its distributors?
A: Normally yes, but not when the distributor is buying the item for their own personal or business use rather than for resale — in that case tax should be computed on the organization's sales price to the distributor, at the tax rate for the distributor's location.

Q: Who has to identify which items are for a distributor's own use?
A: The distributor. If the distributor doesn't advise the organization which items are for their own use and ends up overpaying tax as a result, the fix is a refund request, not an automatic adjustment.

Q: How does a distributor request a refund of overpaid tax?
A: By identifying to the direct sales organization which items were overtaxed — for example, by sending a copy of the invoice noting which items are for the distributor's own use.

Q: How does the direct sales organization recover the tax it refunds or credits to a distributor?
A: After refunding the tax directly, or crediting it to the distributor's account with the distributor's written consent, the organization can take credit on its next sales and use tax return or seek reimbursement under the procedures in subsection (a) of Rule 3.325.

Citations and references

Regulations:

• 34 Tex. Admin. Code Rule 3.325 (refund/credit procedures; subsection (a) referenced)
• 34 Tex. Admin. Code Rule 3.338 (enclosed by the Comptroller; contents not described in this 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/9507960L

Original ruling text

July 28, 1995

Dear **:

I have received a letter from ** requesting I write to you regarding
sales tax refund procedures.

In this scenario, the direct sales organization collects and remits sales and
use tax on Texas sales made by its distributors. You normally collect tax based
on the retail sales price. However, sales of items to a distributor for
personal or business use (other than resale) 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. The distributor does, however, need to
advise you as to which items are for their use. If the distributor does not
advise you and subsequently overpays the tax, the distributor may request a
refund of the tax overpaid from the direct sales organization. The distributor
should identify to you on which items the tax was overpaid (e.g., sending a
copy of the invoice and noting what items are for the distributor's use).

After refunding the tax directly or, with the purchaser's written consent,
crediting the tax to the account of the purchaser, you may then take credit on
your next sales and use tax return or seek reimbursement in accordance to
procedures outlined in subsection (a) of enclosed Rule 3.325. I am also
enclosing a copy of Rule 3.338.

If you have any questions, please feel free to call one of our tax specialists
toll free at 1-800-252-5555. You may also write the Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Joan Hale
Tax Administration Division