When a multi-level marketing company (MLMC) sells products to its own independent distributors for their personal use (not for resale), should it collect sales tax on the wholesale price the distributor actually pays, or the retail price?

Plain-English summary

An independent distributor of a multi-level marketing company (MLMC) — who pays a small membership fee to buy products at wholesale prices — noticed the company was collecting sales tax on the retail selling price rather than the wholesale price actually paid, even though an estimated 85-90% of distributor purchases are for personal use (not resale) under a monthly auto-ship arrangement with a signed personal-use affidavit. The distributor asked the Comptroller to clarify the correct collection procedure.

The Comptroller's answer: when an MLMC sells items to its own distributors for their personal use, it should collect sales tax on the actual amount it charges the distributor for those items — not the retail price the distributor would otherwise charge a customer. The key trigger is communication: the distributor needs to tell the MLMC, at the time of ordering, that the purchase is for personal use, so the MLMC knows to collect tax on the actual (often wholesale) purchase price rather than defaulting to the retail price.

If a distributor doesn't flag a personal-use purchase up front and ends up taxed on the retail price, they can ask the MLMC for a refund of the excess tax collected. Once the MLMC refunds that tax to the distributor (or credits it to the distributor's account with written consent), the MLMC can recover that amount either as a credit on its next sales tax return or by requesting a refund from the Comptroller directly. The letter is explicit that any tax an MLMC collects under these circumstances must ultimately either be refunded to the customer or remitted to the state — keeping the excess is a violation of tax law, and the Comptroller offered to follow up directly with a noncompliant company if asked.

What this means for you

Independent distributors of MLM/direct sales companies

If you buy products for your own personal use rather than for resale, tell the company at the time you place the order — that's what triggers tax on the actual price you pay rather than the (often higher) retail price. If you were charged retail-price tax on a personal-use purchase, you can request a refund of the difference from the company.

Multi-level marketing companies and direct sales organizations

Collect tax on the actual amount charged to a distributor buying for personal use, based on what the distributor tells you at order time — don't default every distributor sale to retail-price tax collection. Any excess tax collected must be refunded to the distributor or remitted to the state; retaining it is a tax law violation.

Accountants and tax professionals

This letter is a useful, plain illustration of how personal-use purchases by an organization's own distributors/members are taxed on the actual price paid (once properly flagged), distinct from the organization's broader retail-price collection responsibility for ordinary customer sales.

Common questions

Q: Should an MLMC collect sales tax on the wholesale or retail price when a distributor buys products for personal use?
A: The actual amount charged to the distributor (often the wholesale price) — but only if the distributor tells the company at order time that the purchase is for personal use.

Q: What if I was charged tax on the retail price for a personal-use purchase?
A: You can ask the MLMC for a refund of the excess tax; the company can then recover that amount via a credit on its next sales tax return or a refund request to the Comptroller.

Q: What happens if a company keeps the excess tax instead of refunding or remitting it?
A: That's a violation of tax law — the Comptroller says any tax collected under these circumstances must either be refunded to the customer or remitted to the state.

Q: Can I rely on this letter for my own MLM distributorship?
A: No. This opinion is based on the facts presented, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• No specific Tax Code section or Comptroller rule number is cited in the body of this letter; it applies the Comptroller's general sales-price-basis-for-tax framework to personal-use purchases by an MLM company's own distributors.

Subject

Direct Sales Organization/Multi — Level Marketing Company — Sales To Independent Distributors For Personal Use

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9801234L

Original ruling text

January 28, 1998

SUBJECT: RE: Collecting Sales Tax

Dear **:

Mr. Sharp passed along your message and asked that I contact you. You asked
that we address the correct tax collecting procedures a multi-level marketing
company (MLMC) should follow.

As I understand it, you are an independent distributor of an MLMC. The MLMC
sells its customers a membership for a small fee. The membership allows
customers to purchase products at wholesale prices. Although the products are
purchased at wholesale prices, the MLMC collects tax on the retail selling
price. To avoid paying sales tax on the retail selling price, the purchaser
must agree to automatically receive the products each month and sign an
affidavit stating the products are for personal use, not for resale. You
estimated between 85 and 90 percent of the purchases are for personal use, not
for resale, and questioned whether the company is reporting tax on the retail
or wholesale price.

When an MLMC sells items to its distributors for their own use, the MLMC should
collect tax on the amount it charges the distributors. The distributors should
tell the MLMC when they place the order that they are purchasing items for
their own use. The MLMC will then know to collect tax from them on the amount
they pay for the items.

If the distributors do not tell the MLMC when they order items for their use
and pay tax on the retail price of the items, they may ask the MLMC to refund
them the additional tax. After the MLMC refunds the tax or, with the
distributor's written consent, credits the tax to the distributor's account,
the MLMC may take credit on its next sales tax return or request a refund from
this office.

The MLMC must remit all monies it represents and collects as Texas sales tax.
Any tax collected directly from customers under these circumstances should
either be refunded to the customers or left in the hands of the state. Failure
to do so is a violation of tax law.

If you feel an MLMC is not complying with these provisions, please let me know
and we will contact the company. You may also want to share this letter with
the company.

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

I hope this information is helpful. If you have any questions, please do not
hesitate to contact me. I can be reached by phone at 1-800-531-5441, extension
5-0030, or by e-mail at . Our mailing address is Tax
Policy Division, Comptroller of Public Accounts, P. O. Box 13528, Austin, Texas
78711.

Sincerely,

David Somerville
Tax Policy Division

cc: JOHN SHARP