Are shipping/handling charges and membership fees a direct-sales (multi-level marketing) company charges its independent distributors subject to Texas sales tax?

Plain-English summary

A direct-sales (multi-level marketing) company asked about the taxability of shipping/handling charges and membership charges billed to its independent distributors. Shipping and handling charges billed by a seller of taxable items are normally taxable — but the Comptroller allows an exception: shipping and handling for taxable items sold to independent distributors for resale at the suggested retail price is not separately taxed, because that cost is already factored into the distributor's suggested retail selling price, which is itself taxed when sold to the end customer.

That exception has limits. If a distributor passes the shipping/handling cost on by separately stating it to their own customer, it becomes taxable as part of the distributor's total selling price — which can force the distributor to file an adjustment and remit additional tax if their price to customers ends up higher than the suggested retail price. And shipping/handling charges for items not purchased for resale — sales aids, personal-use items, or other items the distributor keeps for themselves — are taxable to the distributor; the company must collect sales tax on those.

On membership charges: a membership fee to become an independent distributor is not taxable unless the membership package includes catalogs, printed information, sales aids, samples, or products. Here, the $12/year membership included two bi-monthly publications, so the whole membership charge was taxable. Had the company separately stated a charge for the tangible publications from a separate charge for becoming a distributor, the distributor-enrollment charge itself would not have been taxable.

What this means for you

Multi-level marketing and direct-sales companies

Shipping/handling for resale-priced product sold to your distributors escapes separate tax (it's baked into the taxed retail price), but shipping/handling for sales aids or personal-use items is taxable, and a membership fee is only nontaxable if you strip out or separately state any tangible items (catalogs, publications, samples) bundled into it.

Independent distributors

If you mark up shipping/handling above the suggested retail price and separately state it to your own customers, you may owe additional tax back to the parent company beyond what was already built into the suggested retail price.

Common questions

Q: Is shipping/handling for resale merchandise taxable to distributors?
A: Not separately — it's factored into the already-taxed suggested retail price, unless the distributor marks it up and separately states it to their own customer.

Q: Is a distributor membership fee taxable?
A: Only if it bundles in tangible items like catalogs, publications, sales aids, samples, or products, without separately stating their charge.

Q: Can another MLM company rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710933L

Original ruling text

October 2, 1997

Dear ****:

Thank you for your letter concerning the taxability of shipping and handling
charges and membership charges to your distributors.

Shipping and handling charges billed by a seller of taxable items are normally
taxable. However, we allow the shipping and handling charges for taxable items
sold to independent distributors for resale at the suggested retail price to
not be taxed. The reason is the charge for shipping and handling and the
company's wholesale selling price to the distributor are costs already factored
into the independent distributor's suggested retail selling price that is
taxed. However, independent distributors should be aware that if they pass on
this cost or expense by separately stating the shipping and handling to their
customer, it is taxable as part of their total selling price. This may cause
an independent distributor to have to file an adjustment and remit additional
tax to the direct sales organization if the price charged to customers is
greater than the suggested retail price.

Shipping and handling charges for sales aids, personal use items, and other
items not purchased for resale at the suggested retail price are taxable to the
independent distributors. You must collect sales tax on shipping and handling
charges in connection with the sale of items used by the independent
distributor.

A membership charge to an independent distributor is not taxable unless the
membership includes catalogs, printed information, sales aids, samples, or
products. Therefore, the twelve dollar per year membership charge is taxable
because the members receive the two bi-monthly publications for their
membership. If there was a separately stated charge for the tangible personal
property (i.e., publications), a separate charge for becoming an independent
distributor would not be taxable.

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