Who is responsible for collecting and remitting state and local sales tax when a direct sales/multi-level marketing company's independent distributors sell to end consumers, and how should local tax be tracked across Texas's different city/county/district/transit rates?

Plain-English summary

A direct sales/multi-level marketing organization ("DISTRIBUTOR" in the letter) proposed a process for collecting and remitting sales tax on sales its Independent Business Owners make to end consumers, and asked the Comptroller to confirm it complied with Texas rules. The Comptroller confirmed the proposal matched Rule 3.286 (Seller's and Purchaser's Responsibilities) and used the opportunity to lay out the Comptroller's general position on direct sales organizations:

Who collects the tax: the direct sales organization itself is responsible for collecting and remitting state and local sales/use tax on Texas sales made by its distributors — not the individual distributors — per Rule 3.286 subsections (a)(1)(D), (a)(3), and (b)(3).

The local tax landscape they have to track: on top of the 6 1/4% state rate, up to four layers of local tax can apply to a given sale — a city rate (1%–2%, for cities that impose it), a county rate (up to 1/2%, for property tax relief), a special purpose district rate (1/8%–1%, in various local jurisdictions), and a transit authority rate (varying by area — Austin, Dallas, and Houston at 1%; San Antonio, Fort Worth, Corpus Christi, and El Paso at 1/2%; Laredo at 1/4%).

Two suggested accounting methods, depending on business model:

• Distributor takes the order before buying from the company: the order blank should show the tax due and which local jurisdiction it belongs to, and the organization collects/remits based on copies of those orders.
• Distributor buys inventory before the customer orders: the organization collects/remits based on the suggested retail price and the tax rate for the distributor's location, reconciled through periodic reports the distributors submit showing sales by local jurisdiction, sales in no-local-tax areas, and exempt sales (like out-of-state shipments). Any tax collected from distributors that wasn't actually due should be refunded or credited to them.

Distributor's own purchases (not resale): items a distributor buys for personal or business use — like sales aids, prizes given to customers, or products for the distributor's own use — are taxed on the organization's actual price to the distributor, at the distributor's local tax rate.

What this means for you

Direct sales and MLM companies operating in Texas

You — not your individual distributors — bear the legal duty to collect and remit sales tax on distributor sales, including all applicable local tax layers. Build your order/reporting systems around one of the two accounting methods described here (pre-purchase order-based, or post-purchase retail-price-based with periodic distributor reporting) so you can correctly allocate tax across Texas's patchwork of city/county/district/transit rates.

Distributors/Independent Business Owners

Sales tax collection and remittance responsibility rests with the parent organization, not with you individually — but you'll typically need to report your sales by local jurisdiction (or confirm order-blank tax amounts) so the organization can remit correctly.

Accountants advising direct sales companies

This letter is a clean, general-application reference for Rule 3.286's allocation of collection duty to the direct sales organization, plus a practical walkthrough of Texas's up-to-four-layer local tax stack and two accepted accounting methods for tracking it across a distributor network.

Common questions

Q: Who's responsible for collecting sales tax when independent distributors sell my company's products?
A: The direct sales organization itself, not the individual distributors, under Rule 3.286.

Q: How many layers of local tax could apply to one sale in Texas?
A: Up to four: city, county, special purpose district, and (in eight defined transit areas) a transit authority tax, on top of the 6 1/4% state rate.

Q: How do I account for local tax if my distributors take orders before I ship inventory to them?
A: Show the tax due and its jurisdiction on the order blank, and collect/remit based on copies of those orders.

Q: What if my distributors buy inventory first and then sell to customers?
A: Collect/remit based on the suggested retail price and the distributor's local tax rate, reconciled through periodic distributor sales reports.

Q: Is tax due on items a distributor buys for their own use, like sales aids or prizes?
A: Yes — taxed on the organization's actual price to the distributor, at the distributor's local rate.

Q: Can I rely on this letter for my own company's tax collection process?
A: No. This opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Citations and references

Rules:

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

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200004182L

Original ruling text

April 12, 2000

Dear **:

Thank you for the March 29th letter from ** requesting that
DISTRIBUTOR collect and remit sales taxes, received by Independent Business
Owners from end consumers.

Your proposed process is in accordance with Rule 3.286, Seller's and
Purchaser's Responsibilities. DISTRIBUTOR, as a direct sales organization, is
responsible for the collection and remittance of the sales tax collected by the
Independent Business Owners selling DISTRIBUTOR's products. For your
information, the following is our general response to direct sales
organizations:

A direct sales organization is responsible for collecting and remitting state
and local sales or use taxes on Texas sales made by its distributors. Please
see subsections (a)(1)(D), (a)(3), and (b)(3) of enclosed Rule 3.286 on
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 on local tax rates.

We suggest the following methods for accounting for local taxes that 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 to
the direct sales organization indicating the amount of sales in each local
taxing jurisdiction, the amount of sales in areas having no local taxes, and
any exempt sales such as products shipped by the distributor to customers
outside Texas. The direct sales organization's sales tax return should reflect
the compilation of these internal reports and the regular sales for that
reporting period. Any amount of tax the direct sales organization collects
from distributors that is not due, should be refunded or credited to them.

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

cc: **