Did Utah sales tax apply to a multilevel marketer's annual distributor renewal fee and shipping-and-handling charges on resale and nonresale orders?

Plain-English summary

Utah Private Letter Ruling 99-025 gave different answers for the multilevel marketer's annual renewal fee and shipping-and-handling charges.

The annual fee was taxable because it purchased a monthly distributor newsletter and support services. The newsletter was not a qualifying newspaper: it was company-focused, circulated only to distributors, and published monthly rather than daily or weekly.

Shipping and handling on merchandise intended for resale was generally not taxed under the described multilevel-marketing arrangement because tax was already computed on the suggested retail price. Different results applied if distributors sold above that price or bought products for their own use.

Business model

The company sold nutritional, dietary, and skin-care products through independent distributors in Utah.

Instead of each distributor filing a Utah return, the company collected tax from distributors and filed one Utah sales and use tax return.

The company asked about:

1. An annual distributor renewal fee that included a one-year monthly newsletter subscription and support services.
2. Fixed or percentage-based shipping-and-handling charges for products sent by UPS ground.

Annual renewal fee was taxable

The Commission looked beyond the label “annual renewal fee” to what the distributor actually bought.

It identified the transaction as the purchase of a monthly newsletter and support services.

Utah Code section 59-12-104(17) exempted newspapers and newspaper subscriptions. Under Utah Admin. Code R865-19S-65(A)(2), the publication also had to meet requirements involving frequency, general-public circulation, general-interest content, and current events.

The company newsletter did not qualify because:

• It concerned the company and its products rather than matters of general interest and current events.
• It circulated to distributors rather than the general public.
• It was distributed monthly rather than daily or weekly.

The Commission therefore treated the annual fee as a taxable sale of the newsletter.

Resale shipments under the MLM agreement

The Commission said the current Multi-Level Marketing Sales Tax Agreement required the company to compute and remit tax on the suggested retail sales price.

That theoretical retail price included all product costs, including shipping and handling.

Taxing both the suggested retail price and the separate shipping charge imposed on the distributor could therefore tax the shipping component twice.

The company also acted as the distributors' agent when collecting and remitting tax. The taxable retail sale was the distributor's sale to the final customer, who did not pay a direct shipping charge to the company.

For items bought by the distributor for resale, the resale exemption applied to the company's associated shipping-and-handling charge.

When distributors sold above suggested retail

The Commission added a condition.

If a distributor charged the final customer more than the suggested retail price on which the company had already paid tax, the Commission would assume the additional amount reflected at least part of the shipping and handling charged to the distributor.

In that situation, the company should collect and remit tax on its shipping-and-handling fees to distributors.

Products not intended for resale

When a distributor bought product for personal use rather than resale, the distributor was the final consumer.

Shipping and handling was then taxable unless the freight charge satisfied the common-carrier exemption.

The response listed four requirements under Utah Admin. Code R865-19S-71:

1. Shipment by common carrier.
2. Transportation charges separately stated.
3. Charges equal to the actual cost of shipping the particular property.
4. Shipment after passage of title.

The company's fee was either fixed or calculated as a percentage of the product price. It did not equal the actual shipping cost for the particular product, so the third requirement failed.

The nonresale shipping-and-handling charge was therefore taxable even if the other requirements were met.

Holding

Under the stated facts:

• The annual renewal fee was taxable because the newsletter did not qualify for the newspaper exemption.
• Shipping and handling on distributor purchases for resale was generally not taxable.
• Shipping became taxable if the distributor sold above the suggested retail price under the described arrangement.
• Shipping on products bought by distributors for their own use was taxable.
• The fixed or percentage shipping fee failed the actual-cost requirement for the freight exemption.

What this means for you

Multilevel marketers and direct sellers

Tax treatment can depend on who makes the retail sale, the contractual collection arrangement, the suggested retail price, and whether the distributor buys for resale or use.

Independent distributors

Personal-use purchases and resale inventory can produce different shipping-tax outcomes.

Accountants and tax professionals

Document resale status, final-customer pricing, actual freight cost, separate statement, carrier, and passage of title. A label such as renewal fee or shipping and handling does not control by itself.

Common questions

Q: Was the annual distributor renewal fee taxable?

A: Yes. The Commission treated it as a purchase of a taxable monthly newsletter and support services.

Q: Why did the newsletter fail the newspaper exemption?

A: It was monthly, distributed only to company distributors, and focused on the company and its products.

Q: Was shipping on resale inventory taxable?

A: Generally no under the described multilevel-marketing agreement and suggested-retail-price method.

Q: What if distributors charged customers more than suggested retail?

A: The Commission said the company should collect tax on the shipping-and-handling fees charged to distributors.

Q: Was shipping on a distributor's personal-use purchase taxable?

A: Yes, unless all freight-exemption conditions were met.

Q: Why did the company's shipping fee fail the freight exemption?

A: The fixed or percentage fee did not reflect the actual cost of shipping the particular property.

Key source language

• Substance over label: “we look beyond that label to examine the underlying nature of the transaction.”
• Renewal fee: “the annual renewal fee represents the sale of a taxable newsletter and, thus, is a taxable transaction.”
• Resale shipping: “you should not charge sales tax on the shipping and handling charges you impose upon your distributors on shipments that are intended for resale.”
• Nonresale shipping: “the shipping and handling charge does not qualify for the exemption and is subject to taxation when the sale to the distributor is not intended for resale.”

Citations and references

• Utah Code Ann. § 59-12-104(16)
• Utah Code Ann. § 59-12-104(17)
• Utah Admin. Code R865-19S-65(A)(2)
• Utah Admin. Code R865-19S-71
• Utah Multi-Level Marketing Sales Tax Agreement

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 99-025
• Date note: the request is dated September 1, 1998; the official response is dated August 23, 2000.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

99-025

Response
August 23, 2000

REQUEST
LETTER

99‑025

September 1, 1998

Dear Tax Research & Analysis;

COMPANY sells nutritional, dietary, and skin care
products through a multi-level network of independent distributors. We are considered an "MLM" or multi-level marketer such as COMPANIES, etc. Our physical location is in CITY, STATE. We charge tax based on where we ship to. COMPANY files one Utah state sales/use tax return rather than each distributor filing a return with Utah.

1). Distributors will renew their status annually. The
annual renewal fee of $$$$$ will be due on the anniversary of their enrollment date. This fee will entitle the distributor to a one-year subscription to a monthly newsletter, as well as distributor support services.

2). We will charge the distributors a shipping and
handling charge. The charge will be
based on the type of purchase - cans or cases of product. The cans of product ordered will have a % percent shipping and handling charge with a minimum charge of $$$$$. The cases of product ordered will have a # percent shipping and handling charge. Orders will be shipped UPS ground. If the order is lost in transit, the distributor will contact COMPANY and we will contact UPS to file a claim.

We need a letter ruling or binding opinion as to
whether the above are taxable or exempt based on your state=s tax laws, regulations, etc. A response in letter form is preferred. My fax number is ##### or my e-mail address is #####.

If you need additional information for your determination
of taxability, please call me at #####. Thank you.

Sincerely,

RESPONSE
LETTER

August 23, 2000

RE: Request
for Advisory Opinion Concerning Annual Renewal Fees and Shipping Charges

Dear NAME,

We have received your request for an advisory opinion
concerning the taxability of certain charges you impose upon your distributors in Utah. Specifically, you ask if amounts charged for annual renewal fees and shipping fees are subject to sales tax in Utah.

Annual Renewal Fees. From your description, the
annual renewal fee paid by the distributor entitles that distributor to a monthly newsletter and support service. Although you have labeled these charges Aannual renewal fees,@ we look beyond that label to examine the underlying nature of the transaction. What the distributor is actually purchasing is a monthly newsletter and support services.

Utah Code Ann. '59-12-104(17)
specifically exempts from taxation the sales of newspapers or newspaper subscriptions. To be classified as a newspaper for purposes of this exemption, Utah Admin. Code R865-19S-65(A)(2) requires that the Anewspaper@ be published at short intervals, daily, or weekly, be intended for circulation among the general public, and contain matters of general interest and report on current events. It is assumed that your company=s newsletter will contain matters relating to your company and products, not matters of general interest and current events. Also, the intended audience for your newsletter is your distributors, not the general public. Lastly, it is distributed monthly, not daily or weekly. For these reasons, your newsletter does not qualify as a Anewspaper@ for purposes of the sales tax exemption. Accordingly, the annual renewal fee represents the sale of a taxable newsletter and, thus, is a taxable transaction.

Shipping and Handling Charges on Shipments Intended
for Resale. You have identified your company as a Amulti-level marketer@ that sells its products to independent distributors located in Utah. Instead of the independent distributors individually collecting and remitting sales tax on their sales to the final consumers, your company collects and remits one Utah sales and use tax return based on tax you collect from your distributors at the time they make their purchases from you.

The current Multi-Level Marketing Sales Tax Agreement
(copy enclosed) used by the Tax Commission specifically requires a multi-level marketer to remit sales tax that is Acomputed on the suggested retail sales price of products based on [a company=s] price list.@ As a result, sales tax is collected on a price that theoretically includes all costs associated with a product, including its shipping and handling costs. To charge sales tax on both the suggested retail sales price and the shipping and handling costs charged to the distributor could result in double taxation of the shipping and handling costs.

In addition, your company is acting as an agent for
its independent distributors when it collects and remits the sales tax on their behalf. Thus, it is the sales by the distributor to the final consumer that is the taxable transaction. There are no direct shipping and handling charges paid by the final consumer. The shipping and handling charge is part of the transaction between your company and its distributors, and when the items are being purchased by the distributor are for resale, the resale exemption applies to any associated shipping and handling charge. For these reasons, you should not charge sales tax on the shipping and handling charges you impose upon your distributors on shipments that are intended for resale.

However, should your distributors charge the final customers
a price that is higher than the suggested retail price (on which sales tax should already be paid by your company), it will be assumed that the additional price that is in addition to the suggested retail price reflects, at least in part, the shipping and handling charge that your company has charged its distributors. In this situation, your company should collect and remit sales tax on the shipping and handling fees charged to your distributors.

Shipping and Handling Charges on Shipments NOT Intended
for Resale. On the other hand, should you sell product directly to your distributors that is not intended for resale, the taxable transaction occurs between your company and the distributor, who is considered the final consumer. In this situation, sales tax is also due on the shipping and handling charges, unless certain conditions as detailed below are met. Section 59-12-104(16) provides an exemption from sales tax on intrastate movements of freight by common carrier. Interstate shipments are treated similarly. To qualify for the exemption, Utah Admin. Code R865-19S-71 requires that the transportation charges satisfy the following conditions:

1. Shipment
   must take place by means of common carrier;

2. Charges
   must be segregated and listed separately;

3. Charges
   must reflect the actual cost of shipping the particular tangible personal property by common carrier; and

4. Shipment of
   the tangible personal property must take place after passage of title.

Your company imposes a shipping and handling charge of
either $4.50 or a certain percentage of the total product price. In either instance, the shipping and handling charge does not reflect the actual cost of shipping the particular product purchased by the distributor, and the third criterium is not met. Accordingly, even if all other criteria are met, the shipping and handling charge does not qualify for the exemption and is subject to taxation when the sale to the distributor is not intended for resale.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner