As a direct sales organization (multi-level marketing company), who is responsible for collecting and remitting Texas sales/use tax on sales made by its distributors, and how should local tax be tracked?

Plain-English summary

The Comptroller's Tax Policy Division wrote to a direct sales organization (a multi-level marketing company that sells through independent distributors) to confirm who is responsible for collecting and remitting Texas sales/use tax on sales the distributors make. Under Rule 3.286(a)(3) and Tax Code Sec. 151.024, the direct sales organization itself is responsible for collecting and remitting the tax on the Texas sales its distributors make — the obligation runs to the company, not to each individual distributor.

The letter then explains how to handle the patchwork of Texas local sales and use taxes (city, county, special purpose district, and transit authority taxes, on top of the 6 1/4% state rate) depending on how a distributor's sale happens:

• If the distributor takes the customer's order before purchasing the item from the company: the order blank itself should show the tax due and which local jurisdictions it belongs to, and the company collects and remits based on those order copies.
• If the distributor buys the item first and then sells it to the customer: the company should collect and remit tax based on the retail sales price and the tax rate at the distributor's own location, with distributors periodically reporting their sales by local jurisdiction (including no-local-tax areas and exempt sales) so the company's return reflects the combined totals. Any tax collected from a distributor that wasn't actually due should be refunded to the distributor per Rule 3.325(b).

Separately, when the company sells items to a distributor for the distributor's own personal or business use — such as product samples, sales aids, or prizes given to customers — tax is computed on the company's sales price to the distributor, at the tax rate for the distributor's location.

What this means for you

Direct sales / multi-level marketing companies

If you operate as a direct sales organization selling through independent distributors in Texas, the collection and remittance obligation for sales/use tax on those distributor sales falls on your company, not on the individual distributors. You need a system to track local tax jurisdictions correctly whether your distributors take orders before or after they purchase inventory from you.

Companies with distributors who pre-purchase inventory

Have distributors report their local sales tax jurisdiction, no-tax-area sales, and exempt sales periodically, and consolidate that into your own sales tax return alongside your regular sales for the period.

Companies with distributors who take orders first

Build the local tax jurisdiction and rate directly onto the order form so it can be collected and remitted correctly from the order copies.

Company purchases for distributor use

Items you sell to distributors for their own personal or business use (product samples, sales aids, prizes for customers) are taxed on your sales price to the distributor, using the tax rate for the distributor's location — not the eventual customer's location.

Common questions

Q: Who is responsible for collecting and remitting sales tax on sales made by distributors of a direct sales / MLM company?
A: The direct sales organization itself, under Rule 3.286(a)(3) and Tax Code Sec. 151.024 — not each individual distributor.

Q: How should local tax be allocated if a distributor takes a customer's order before buying the item from the company?
A: The order blank should show the tax due and the local jurisdictions it belongs to, and the company collects and remits based on those orders.

Q: How should local tax be allocated if the distributor buys the item first and resells it?
A: Tax is collected and remitted based on the retail sales price and the tax rate at the distributor's location, using periodic distributor reports of sales by jurisdiction.

Q: What happens if the company collects tax from a distributor that wasn't actually due?
A: It should be returned to the distributor, as outlined in Rule 3.325(b).

Q: How is tax computed on items a company sells to its own distributors for their personal or business use (like sales aids or prizes)?
A: Tax is computed on the company's sales price to the distributor, at the tax rate for the distributor's location.

Q: Can another direct sales company rely on this letter?
A: No. STAR letters are addressed to a specific taxpayer's facts and can only be relied on by that taxpayer; other companies should confirm current guidance with the Comptroller or a tax professional.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286(a)(3) (direct sales organizations: collection and remittance of sales/use tax on distributor sales)
• Tex. Tax Code Sec. 151.024
• 34 Tex. Admin. Code Rule 3.325(b) (refunding tax collected in error)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602L1398G14

Original ruling text

February 5, 1996

Dear **:

As a direct sales organization, *** is responsible for collecting
and remitting sales or use tax on Texas sales made by its distributors.
Please see section (a)(3) of the enclosed Rule 3.286. Also see Texas Tax
Code Sec. 151.024.

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,
Austin, and Houston at 1%, San Antonio at 1/2%; Fort Worth, Corpus Christi,
and El Paso at 1/2%; and Laredo at 1/4%. Please refer to the enclosed
booklet, "Sales Tax Rates in Texas" for further information.

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.

If you have any questions, or need more information please write or call me
toll free at 1-800-531-5441, extension 50330.

Sincerely,

Bettie Peterson
Tax Policy Division

NOTE: Previous Accession Number 9602033L