Could a direct-selling company replace its suggested-retail-price tax agreement with one calculating tax on independent agents' product cost?

Plain-English summary

Utah Private Letter Ruling 95-074 rejected a direct-selling company's proposal to calculate tax on independent sales agents' product cost for all purchases.

The Commission assumed agents resold at least some products above cost. Tax on those retail sales had to reflect the amount for which the products were resold.

Agent cost was an appropriate tax base for products the agent consumed or used rather than resold.

The existing agreement using suggested retail price remained in effect while the Commission reviewed its broader practice.

Existing agreement

Under a 1990 agreement, the company collected tax on behalf of its independent sales agents.

The agreement assumed agents bought products at wholesale and resold them.

Tax was calculated using the suggested retail price rather than the agent's wholesale cost.

Proposed replacement

The company said its recent analysis showed agents personally consumed most of the products they purchased.

It proposed a replacement agreement intended to use a tax base that better reflected personal use.

The proposal used the retailer's or agent's product cost as the tax base.

Resale inventory

The Commission declined the proposal because agents were assumed to resell products above cost.

For resale transactions, tax had to be collected on the amount charged in the retail sale rather than the agent's acquisition cost.

The Commission would not accept cost as a universal substitute for the retail-sales price.

Personal-use and giveaway products

The Commission identified purchases for which agent cost was the appropriate tax base:

• Products for the agent's own use.
• Products used in advertising.
• Products given away as gifts.
• Products given away as customer incentives.

For those transactions, the agent was the consumer rather than a reseller.

No blanket personal-use assumption

The company argued that most agent purchases were personally consumed.

The Commission declined to assume that all or most purchases were for personal use.

The distinction had to follow the actual disposition of the product rather than a broad company-wide assumption.

Existing practice continued

The Commission said it had agreements with similar companies allowing tax collection on suggested retail price.

It was reviewing that practice.

Until the review produced a change, the Commission would continue operating under the company's current agreement.

Holding

Under the ruling:

• The proposed cost-based agreement was rejected.
• Resold products used the retail-sale amount as the tax base.
• Personally consumed, advertised, gifted, or incentive products used agent cost.
• The Commission would not presume most or all purchases were personal use.
• The existing suggested-retail-price agreement continued during the policy review.

What this means for you

Direct-selling companies and multilevel marketers

Track whether agents resell, consume, advertise with, or give away each product category. One tax base may not fit every disposition.

Independent sales agents

Personal-use and resale purchases can create different tax calculations.

Accountants and tax professionals

Verify current Utah agreements and statutes. This ruling resolved a proposed 1995 agreement, not a universal modern collection method.

Common questions

Q: Did Utah approve tax on agent cost for all purchases?

A: No.

Q: What tax base applied when agents resold products?

A: The retail-sale amount, reflected by the existing suggested-retail-price agreement.

Q: When could agent cost be used?

A: For personal use, advertising, gifts, and customer incentives.

Q: Did Utah accept that most agent purchases were personal use?

A: No.

Q: What happened to the old agreement?

A: It remained in effect while the Commission reviewed the broader practice.

Key source language

• Rejection: “We decline to enter the agreement because it uses the retailers cost of product as the basis for calculating taxes.”
• Resale amount: “We assume that the retailers resell your products above cost, and sales tax must be collected on that amount.”
• Personal-use cost: “it is appropriate to calculate the sales tax on the sales agent's cost of the product.”
• Continued agreement: “we will continue to operate under our current agreement with your company.”

Citations and references

The official response did not cite a statute, regulation, or numbered administrative publication.

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 95-074
• Agreement note: the response rejected a proposed replacement and continued the existing company-specific agreement pending review.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

95-074

Response October 17, 1995

Request

October 4, 1995

Mr. Val Oveson, Tax Commissioner

Utah State Tax Commission

210 North 1950 West

Salt Lake City, Utah 84134

Re: XXXXX

Dear Mr. Oveson:

The purpose of this letter is to propose a new agreement that will replace the above-referenced agreement (copy enclosed) which was entered into by XXXXX and the Utah State Tax Commission. The agreement of July 16, 1990 was entered into under the presumption that XXXXX independent sales agents resell XXXXX products which they purchase and of which they take receipt. Under this scenario, XXXXX charges independent sales agents "wholesale" price for product purchases and assesses sales tax based upon the suggested retail price (SRP).

Review of personal consumption over the past twelve months reflects the majority of products purchased by independent sales agents are consumed personally by the independent sales agent. The analysis indicates independent sales agents personally consume the majority of their individual product purchases. This high personal use of product by independent sales agents justifies consideration of an alternative agreement which more accurately reflects the facts and circumstances.

Attached is the proposed "draft" agreement to replace the above-referenced agreement. If you have any questions after reviewing the proposed agreement, please contact me and I would be pleased to discuss them with you.

Very truly yours,

XXXXX

October 17, 1995

XXXXX

RE: Draft agreement to collect sales tax on behalf of independent contractors

Dear XXXXX,

We have received your proposed agreement which allows you to collect sales tax for independent sales agents. We decline to enter the agreement because it uses the retailers cost of product as the basis for calculating taxes. We assume that the retailers resell your products above cost, and sales tax must be collected on that amount.

If a sales agent purchases products for his or her own use, for advertising, or to give away as a gift or incentive, it is appropriate to calculate the sales tax on the sales agent's cost of the product. However, we decline to assume that all or most of the agent's purchases are for personal use.

The Commission has entered contracts which allow companies like yours to collect sales tax on the suggested retail price of the products. We are currently reviewing that practice. In the meantime, we will continue to operate under our current agreement with your company.

For the Commission,

Alice Shearer

Commissioner