Can a multi-level-marketing company let its mall-kiosk distributors buy tax-free with a resale certificate, the way a home-based distributor can't?

Plain-English summary

A multi-level-marketing company selling diet and health products asked whether it could accept resale certificates from its "Premiere Distributors" -- independent sellers operating from mall kiosks and storefronts -- so those distributors, rather than the parent company, would collect and remit sales tax directly to the state.

The Comptroller's answer turns on a distinction between two kinds of distributor:

• Home-based independent distributors are not issued their own sales tax permits. Under Tex. Tax Code Sec. 151.024 and Rule 3.286(a)(1), (a)(3), and (b)(3), the direct sales organization itself is treated as the retailer and must collect sales tax from these distributors on the suggested retail price at the time of purchase. The policy exists to avoid the administrative burden of permitting thousands of home-based sellers who frequently start, stop, move, or fail to file.
• Distributors with a genuine retail outlet -- a store in a strip center or a mall kiosk -- ARE issued their own sales tax permits, because permitting them doesn't create that same burden, and they often sell a mix of products beyond just the direct-sales company's line. A retail-outlet distributor with a valid permit can give a resale certificate on its purchases, but must then collect and remit sales tax itself on what it sells to the public.

The company could accept a properly completed resale certificate in good faith from a Premiere Distributor who has obtained a permit and identifies as a storefront/retail business (using the certificate's "description of business activity" field), rather than a home-based one.

What this means for you

Direct sales / multi-level-marketing companies

If your distributors operate from a real retail location (kiosk, storefront, strip-center space) and hold their own sales tax permit, you can accept a resale certificate from them and let them handle collection on their own retail sales. Home-based distributors without a retail outlet are different -- Texas doesn't issue them permits, so you as the parent organization remain responsible for collecting tax from them on the suggested retail price.

Accountants and tax professionals

The line drawn here is physical retail presence plus a valid sales tax permit, not just the type of product sold. A resale certificate is only good-faith acceptable when the purchaser genuinely operates a retail outlet, which the certificate's own business-description field can help document.

Common questions

Q: Do all distributors of a direct-sales company need to pay tax to the parent company?
A: Home-based independent distributors do, under this letter -- the parent organization collects sales tax from them on the retail price. Distributors with an actual retail outlet (store or kiosk) get their own permit instead and collect tax themselves.

Q: Why doesn't Texas issue permits to home-based distributors?
A: Per this letter, the administrative cost of permitting large numbers of frequently-changing home-based sellers is too high, so the direct sales organization is treated as the retailer for those distributors instead.

Q: Can a company just accept any resale certificate from a distributor?
A: This letter says a company may accept a properly completed resale certificate in good faith from a distributor who identifies as operating a retail storefront (not home-based) and holds a valid permit.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.024 (direct sales organizations)
• 34 Tex. Admin. Code Rule 3.286(a)(1), (a)(3), (b)(3) (seller's and purchaser's responsibilities for direct sales organizations)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9807699L

Original ruling text

July 28, 1998

Dear Ms. **:

Thank you for your letter concerning sales of COMPANY A products by "Premiere
Distributors" who sell from kiosks at mall locations.

Situation: COMPANY A, is a multi-level network-marketing corporation selling
dietary supplements and other health related products. You have one location
and use media advertising. Independent distributors purchase products for
resale and sales tax is collected on the retail sales price at the time of
purchase.

COMPANY A has actively promoted independent distribution and the beginning of
1998 has brought your "Premiere Distributor." This Premiere Distributor is
selling COMPANY A products from a kiosk in a mall location. Some of these
distributors have several mall locations underway. To insure that the tax
liability for sales tax collection is properly charged at the point of sale,
COMPANY A would like to accept copies of the Premiere Distributor's resale
certificate, allowing tax exemption upon purchase of product, and having the
Premiere Distributor submit payment of taxes directly to the State of Texas.
You ask that we allow COMPANY A, the authority to accept resale certificates
from your distributors who will be operating from a kiosk at a mall site,
storefront, or strip center environment.

Response: COMPANY A is a direct sales organization that is required to collect
sales and use tax from its independent distributors in Texas. Our policy
regarding direct sales organizations is based on Texas Tax Code Section 151.024
and explained in Rule 3.286(a)(1), (a)(3) and (b)(3) on seller's and
purchaser's responsibilities. The purpose of our policy is to ease the
administrative burden to our state. By regarding the direct sales organization
as the retailer and not permitting the independent distributors, the
administrative burden of permitting thousands of home-based distributors who
sell products for direct sales companies is eliminated. It would be quite
costly to the State of Texas if thousands of individuals (who quickly go in or
out of business, change addresses, and who sometimes fail to file and pay sales
tax reports) were permitted. That is the reason permits are not issued to
distributors operating from their homes and why direct sales organizations are
required to collect sales tax from the independent distributors on the
suggested retail price.

Distributors with retail outlets (e.g., stores in strip centers or mall
locations) are issued permits because this does not impede the efficient
administration of the tax. Distributors with retail outlets often sell a
variety of products besides the products of the direct sales organization and
must have a permit for that outlet in any case. A retail outlet with a valid
sales tax permit may give a resale certificate. The retail outlet will be
required to collect and remit sales tax to the Comptroller's office on the
selling price of the products it sells.

We do not issue sales tax permits to home-based independent distributors so
generally a person with a valid permit is a retailer with a retail outlet. You
may accept in good faith a properly completed resale certificate (enclosed)
from an independent distributor who states on the resale certificate that the
business is a retail store front rather than a home-based business. There is a
section of the resale certificate entitled "Description of the type of business
activity generally engaged in or type of items normally sold by the purchaser"
that can be used for that purpose. In answer to your question, you may accept
a properly completed resale certificate from a "Premiere Distributor" who gets
a sales tax permit to sell COMPANY A products from a kiosk in a mall location.

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 Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division