A direct sales organization selling vitamins through independent Texas distributors needs a Texas sales tax permit. What state and local sales tax rates apply, and how should the organization collect and account for local taxes across all of its distributors' sales?

Plain-English summary

The Comptroller wrote to a direct sales organization after learning it was making taxable sales of vitamins through independent Texas distributors, to lay out its state and local tax collection responsibilities and get it a sales tax permit.

The core rule: the direct sales organization itself is responsible for collecting and remitting all sales and use tax on Texas sales made by its distributors — not the individual distributors — under Rule 3.286, subsections (a)(1)(D), (a)(3), and (b)(3).

On rates, the letter walks through Texas's stacked state-plus-local structure as of 1999: the state rate is 6.25%, and up to four types of local tax can add on top depending on where the sale occurs: a city rate (1%-2%) for cities imposing it, a county rate (up to 0.5%) many counties impose for property tax relief, a special purpose district rate (0.125%-1%) some local jurisdictions (including some counties) impose, and a transit-area rate applicable in eight specific metro areas (Austin, Dallas, Houston at 1%; San Antonio, Fort Worth, Corpus Christi, El Paso at 0.5%; Laredo at 0.25%).

For accounting, the same collection mechanics described in a companion letter apply: if a distributor takes orders before purchasing from the company, the order should show the tax due and its local-jurisdiction allocation, which the organization collects/remits from the order copies; if a distributor purchases before the customer's order is taken, the organization collects/remits based on the suggested retail price and the distributor's local rate, reconciled through periodic distributor reports covering local-jurisdiction sales, no-local-tax-area sales, and exempt-entity sales. Any tax collected from a distributor that wasn't actually due should be returned under Rule 3.325(b)'s refund provisions. Items a distributor buys for personal/business use (own-use products, sales aids, prizes) are taxed on the organization's actual price to the distributor, at the distributor's local rate.

What this means for you

Direct sales/MLM organizations starting Texas distributor operations

You (the organization), not your individual distributors, are legally responsible for Texas sales tax collection and remittance. Apply the state rate plus whichever combination of city, county, special-purpose-district, and transit-area rates apply at each distributor's location, and get a sales tax permit before selling.

Distributors of direct sales companies

You generally won't be the one collecting and filing Texas sales tax yourself — that's your parent organization's job, though your sales reports feed into how it calculates and reconciles taxes owed.

Accountants and tax professionals

A concise reference for Texas's local tax rate stacking (city + county + special purpose district + transit) as it stood in 1999, paired with the standard direct-sales-organization collection mechanics also described in companion letters on this topic (order-blank timing, distributor reporting, refund handling under Rule 3.325(b)).

Common questions

Q: Who is responsible for collecting Texas sales tax on a direct sales organization's distributor sales?
A: The direct sales organization itself, under Rule 3.286, not the individual distributors.

Q: How many different local taxes can stack on top of the state sales tax rate?
A: Up to four: city, county, special purpose district, and (in eight specific metro areas) a transit-area tax.

Q: What happens if a direct sales organization collects more tax from a distributor than was actually due?
A: It should return the excess to the distributor, per Rule 3.325(b)'s refund provisions.

Q: Can I rely on this letter for my own tax rate calculations today?
A: This letter reflects 1999 rates and structure; confirm current state and local rates before relying on the specific percentages, since rates and jurisdictions can change over time.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286, subsections (a)(1)(D), (a)(3), (b)(3) (Seller's and Purchaser's Responsibilities)
• 34 Tex. Admin. Code Rule 3.325(b) (refunds)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9907616L

Original ruling text

July 29, 1999

Dear Taxpayer:

It has recently come to our attention that **, as a direct sales
organization, is making taxable sales of vitamins 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 subsections
(a)(1)(D), (a)(3) and (b)(3) of the enclosed Rule 3.286, Seller's and
Purchaser's Responsibilities.

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 1/8% 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---Austin, Dallas,
and Houston at 1%; San Antonio, Fort Worth, Corpus Christi, and El Paso at
1/2%; Laredo at 1/4%. Please refer to the booklet, Texas Sales and Use Tax
Rates for further information. An application packet for your company to
obtain a Texas sales and use tax permit has been sent under separate cover.

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 suggested retail sales price and the tax rate in effect for the
distributor's location. Periodically, 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) on
refunds.

All sales of items to a distributor for personal or business use should have
tax computed on the direct sales organization's actual price to the distributor
and at the rate of tax for the distributor's location. Examples of these items
include products for the distributors own use, sales aids, and prizes given
away 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 Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division