How did Texas require a direct-sales organization to collect and report state, city, and MTA tax for independent salespeople?

Plain-English summary

The Texas Comptroller quoted revised Rule 3.286 as making a direct-sales organization the seller responsible for collecting and remitting sales tax collected by independent salespeople selling its products.

Under that procedure, distributors and salespeople did not need their own sales-tax permits, bonds or security, or returns. The organization collected tax based on the suggested retail price, and salespeople collected tax from final consumers to reimburse the tax already paid to the organization.

City and MTA tax depended on the city or MTA area where the product was sold. If an area imposed neither tax, neither local tax was due.

For advance orders, salespeople were to show tax on the order form and the organization was to accrue tax from order copies. If salespeople bought inventory before making a sale, the organization collected the full applicable tax on retail selling price, then used periodic salesperson reports to allocate sales among taxed areas, untaxed areas, and exempt purchasers. Tax collected but not due had to be returned to the salesperson or credited against purchases.

What this means for you

Direct-sales organizations

The organization, not each independent salesperson, carried the historical permit, return, collection, and remittance responsibilities described in the letter.

Independent salespeople

Sales location and exempt-customer information still had to flow back to the organization for local-tax reconciliation.

Accountants and tax professionals

The source quotes a 1984 revision of Rule 3.286. Verify the current rule, marketplace and direct-sales provisions, and local-tax sourcing.

Common questions

Q: Who was treated as the seller?
A: The direct-sales organization.

Q: Did each salesperson need a permit and return?
A: No, under the procedure described.

Q: What price was used to collect tax?
A: The suggested retail price.

Q: What happened to local tax collected but not due?
A: It had to be returned to the salesperson or credited against purchases.

Citations and references

• Rule 3.286 (quoted in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8410L0595E12

Original ruling text

October 22, 1984

Dear **:

Thank you for your recent letter requesting that you be allowed to
collect and report the limited sales tax for your consultants.

In a recent revision of rule 3.286, the following language was added:

A direct sales organization engaged in business as defined in paragraph
(1)(d) of this subsection is a seller and is responsible for the collection
and remittance of the sales tax collected by the independent salespersons
selling the organization's product.

In following this procedure, the distributors and salespersons would not
be required to obtain sales tax permits, post bond or security or file
returns.

You are required to collect the tax based on the suggested retail price
of the product. The salespersons would, in turn, collect the tax from
the final consumer and thereby be reimbursed for the tax previously paid
to you.

We suggest the following method of accounting for city sales tax or MTA
tax which is due to the city or MTA area in which the product is sold.
If the product is sold in a city or MTA area which does not have the city
tax or MTA tax, the city or MTA tax would not be due.

If the salespersons take orders before they purchase the products, they
should indicate on the order blank the tax due and you should accrue tax
from the copies of the orders.

If the salespersons purchase the goods before they have a sale, you
should collect a full tax, as applicable, on the retail selling price.
Periodically, the salespersons should submit reports indicating the
amount of sales in such city or MTA area and their district that has the
city sales tax or MTA tax, the amount of sales in the areas having no city
or MTA tax and any sales to exempt purchasers. Your return should reflect
the compilation of these reports and the sales from the regular locations.
The amount of tax that you collect from the salespersons which is not due
should be returned to them or credited against their purchases.

I am enclosing a sales tax application and rule 3.286 for your use.

This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.

Please feel free to contact me if you have additional questions. You
may write me, call toll free 1-800-252-5555 from anywhere in Texas or
phone 512/475-1931.

Sincerely,

Al Van Allen
Tax Policy Section
Tax Administration Division