A direct-sales/multi-level-marketing company asked how it should collect and remit Texas state and local sales/use tax on sales made through its independent distributors.

Plain-English summary

A company running a direct-sales/multi-level-marketing operation asked the Comptroller how its Texas sales/use tax collection and remittance responsibilities work for sales made through its independent distributors. The Comptroller's response: under Rule 3.286(a)(3), the company is treated as a distributor and must collect and remit Texas state and local sales/use tax on those sales itself, and should apply for a Texas sales and use tax permit.

At the time of the letter the state rate was 6 1/4%, with additional local taxes layered on top: city sales/use tax (1% to 2% depending on the city), a 1/2% county tax in many counties, transit-authority taxes in eight areas (Austin, Houston, and Dallas at 1%; San Antonio, Fort Worth, Corpus Christi, and El Paso at 1/2%; Laredo at 1/4%), and special purpose district taxes set by local voters. These local taxes are allocated, collected, and remitted the same way as city sales tax, under Rules 3.374 and 3.375.

The letter lays out two accounting methods depending on how the distributor/company relationship works:

• If the distributor takes orders before purchasing from the company (with the company shipping inventory from outside Texas), the order blank should show the tax due and which local jurisdiction it belongs to, and the company accrues the appropriate taxes from copies of those orders.
• If the distributor purchases the goods before the customer's order is taken, the company collects and reports tax based on the retail sales price and the tax rate for the distributor's location, using periodic reports from distributors showing sales by local jurisdiction, sales in areas with no local tax, and any exempt sales. Any tax collected from distributors that isn't actually due should be refunded to them per Rule 3.325(b).

Separately, the company also owes tax on items it sells or gives to distributors for the distributors' own personal or business use — such as the company's products, sales aids, and prizes — based on the company's sales price to the distributor and the distributor's local tax rate. More broadly, Texas sales/use tax applies to all tangible personal property unless a specific exemption applies to the item itself, its use, or the exempt status of the purchasing entity.

What this means for you

Direct-sales and multi-level-marketing companies

If your company is treated as a distributor under Rule 3.286(a)(3), you are responsible for collecting and remitting Texas state and local sales/use tax on sales made through your independent distributors — the tax obligation doesn't rest on the individual distributors. You should hold a Texas sales and use tax permit.

Setting up your accounting method

Your method for tracking and remitting tax depends on the order of operations: whether the distributor takes the customer's order before buying from you (with you shipping from outside Texas), or whether the distributor buys inventory from you first and then sells to the customer. Each method calls for a different way of computing and reporting the tax due, described in this letter.

Taxing items given to distributors themselves

Don't forget that products, sales aids, and prizes provided to your own distributors for their personal or business use are themselves taxable, based on your sales price to the distributor and that distributor's local tax rate — this is separate from tax on sales to end customers.

Common questions

Q: Is a direct-sales/MLM company responsible for collecting sales tax on sales made by its independent distributors?
A: Yes. Under Rule 3.286(a)(3), such a company is treated as a distributor and must collect and remit the applicable state and local sales/use tax itself.

Q: What local taxes might apply in addition to the state rate?
A: At the time of this letter, the state rate was 6 1/4%, with possible additional city tax (1%-2%), county tax (up to 1/2% in many counties), transit-authority tax in eight listed areas, and special purpose district taxes set locally.

Q: How should tax be calculated if the distributor takes the customer's order before buying from the company?
A: The order blank should show the tax due and the local jurisdiction, and the company accrues the tax from copies of the orders.

Q: How should tax be calculated if the distributor buys the goods before the customer orders them?
A: The company collects and reports tax based on the retail sales price and the tax rate for the distributor's location, using periodic distributor sales reports.

Q: Is tax due on products or prizes given to distributors themselves?
A: Yes — items sold or given to distributors for their personal or business use (products, sales aids, prizes) are taxed based on the company's sales price to the distributor and the distributor's local rate.

Q: Can another company rely on this letter for its own tax treatment?
A: No. STAR letters are based on the specific facts submitted by the requesting taxpayer and can only be relied upon by the taxpayer to whom they were issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286(a)(3) (direct sales organization treated as a distributor for sales/use tax collection)
• 34 Tex. Admin. Code Rule 3.374 (local sales and use tax allocation)
• 34 Tex. Admin. Code Rule 3.375 (local sales and use tax collection and remittance)
• 34 Tex. Admin. Code Rule 3.325(b) (refund of tax collected in error)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602L1397G05

Original ruling text

February 16, 1996

Dear ****:

Thank you for your letter requesting information on your companies
responsibility for Texas sales/use tax. Rule 3.286 (a)(3) provides that your
company be treated as a distributor.

As a result, your company is required to collect and remit Texas sales and use
taxes for its independent distributors. Procedures to collect and remit tax
are set out in this letter. I have also enclosed an application which may be
used to obtain your Texas sales and use tax permit.

The current state sales and use tax rate is 6 1/4% and there are several types
of local sales and use taxes that may be due on a transaction. The city rate
may range from 1% to 2% for those Texas cities imposing the city sales and use
tax. Many counties impose a 1/2% county sales and use tax. There are eight
transit areas that have varying sales and use tax rates: Austin, Houston, and
Dallas at 1%; San Antonio, Fort Worth, Corpus Christi, and El Paso at 1/2%;
and Laredo at 1/4%. Special purpose districts are allowed and may also impose
local sales and use taxes; these rates are determined by the voters of the local
jurisdiction. These taxes are allocated, collected, and remitted in the same
manner as city sales taxes (Rules 3.374 and 3.375). Please refer to the
enclosed brochure, "Sales Tax Rates in Texas" for further information.

We suggest the following methods for accounting for local taxes which are due:

If the distributor takes orders before purchasing from your company, the order
blank should indicate the amount of tax due and to which local taxing
jurisdiction(s) it should be allocated. Your company in turn should accrue the
appropriate taxes from the copies of the orders. I presume that your company
ships the inventory from outside Texas.

If the distributor purchases the goods before the customer's order is taken,
your company should collect and report the amount of tax based on the retail
sales price and the tax rate in effect for your distributor's location.
Periodically, the 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. Your company's return should
reflect the compilation of these reports and the regular sales for that
reporting period. Any amount of tax your company collects from distributors
which is not due should be returned to them as outlined in Rule 3.325(b).

All sales of items to a distributor for personal or business use should have tax
computed on your company's sales price to the distributor and at the rate of tax
for the distributor's location. Examples of these items include your company's
products, sales aids, and prizes awarded to customers.

Texas sales or use tax is due on all items of tangible personal property, unless
the item is specifically exempted because of the item itself, because of its
use, or because it is purchased by an exempt entity for use that promotes the
entity's exempt function.

If you have any questions or need more information, you may call our toll free
number 1-800-531-5441, extension 50892. My direct number is 512/463-4600. You
may write Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

John J. Fitzgibbons
Tax Policy

NOTE: Previous Accession Number 9602031L