As an independent distributor for a direct-sales company, am I responsible for Texas sales tax if the parent company isn't collecting it?

Plain-English summary

An independent distributor of a direct-sales company selling air purifiers in Texas asked a series of questions after the company wasn't charging Texas sales tax on the distributor's own purchases, even though the distributor itself is ineligible for a sales tax permit (as an independent seller of a direct sales organization).

The Comptroller's core explanation: Texas sales tax law lets the Comptroller treat a direct sales organization as the retailer responsible for collecting and remitting tax on sales made through its independent distributors (34 Tex. Admin. Code Rule 3.286(a)(3), (b)(3)). Distributors are not required to hold their own sales tax permits. The company is supposed to collect tax from the distributor based on the suggested retail price, and the distributor then collects tax from its own customers to reimburse itself. If the distributor's actual selling price ends up lower than the suggested retail price, the distributor can request a refund or credit from the company for any resulting overpayment.

Working through the specific questions:

1. Is it unlawful for the company to not collect/remit tax? Yes — the direct sales company is legally required to collect and remit the tax, and failing to do so doesn't relieve it of that obligation. A noncompliant company will be brought into compliance.
2. What are the distributor's own lawful obligations? A distributor must pay tax to the direct sales company on its purchases. If the distributor can't get the company to charge the tax, the distributor should report and pay the tax directly to the Comptroller.
3. Is the distributor personally liable if the company doesn't collect? The direct sales company is regarded as the responsible seller, but under Rule 3.286(e)(1), if tax isn't collected by the seller, either the seller or the purchaser owes it until it's paid — so the Comptroller will accept direct payment from distributors whose company isn't collecting properly.
4. Do distributors have to collect tax from their own customers? Yes, as reimbursement for what they must pay the direct sales company, with a refund/credit mechanism available if the distributor sold below the suggested retail price.

What this means for you

Independent distributors of direct sales / MLM companies

You're generally not required to hold your own sales tax permit — your parent company is supposed to collect tax from you at the suggested retail price. But if the company isn't doing that, you're not off the hook: you can (and under Rule 3.286(e)(1), may need to) report and pay the use tax directly to the Comptroller yourself.

Direct sales / multi-level-marketing companies

You are the party the Comptroller holds responsible for collecting and remitting sales tax on sales through your distributor network. Failing to collect doesn't excuse you from the tax liability, and the Comptroller will bring a noncompliant company into compliance.

Common questions

Q: Do independent distributors need their own sales tax permit?
A: No, per this letter — distributors of a direct sales organization aren't required to hold sales tax permits; the parent company is treated as the retailer responsible for collecting tax.

Q: What if my direct-sales company won't charge me tax?
A: Per this letter, you should report and pay the tax directly to the Comptroller's office, since either the seller or purchaser owes an uncollected tax under Rule 3.286(e)(1).

Q: Can a distributor get money back if they sold below the suggested retail price?
A: Yes — per this letter, a distributor may request a refund or credit from the direct sales company for tax overpaid based on the suggested retail price.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286(a)(3), (b)(3) (Seller's and Purchaser's Responsibilities — direct sales organizations treated as retailer)
• 34 Tex. Admin. Code Rule 3.286(e)(1) (tax owed by seller or purchaser when not collected)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9807763L

Original ruling text

July 1, 1998

Dear Mr. **:

Thank you for your letter regarding sales tax on products sold by independent
distributors of COMPANY A. The following explanation may help before answering
your specific questions.

COMPANY A is a direct sales organization making taxable sales of air purifiers
and other products using independent distributors located in Texas. COMPANY A
is responsible for collecting and remitting sales and use tax on Texas sales
made by its distributors. The sales tax law authorizes the Comptroller to
regard a direct sales organization as the retailer responsible for remitting
the tax to the Comptroller. The distributors are not required to hold sales
tax permits. See subsections (a)(3) and (b)(3) of enclosed Rule 3.286,
Seller's and Purchaser's Responsibilities.

COMPANY A should collect sales tax from you based on the suggested retail
selling price of its products. In turn, you will collect sales tax from your
customers to reimburse yourself for the tax you are required to pay COMPANY A.

We realize there may be circumstances in which a distributor pays more tax than
is due. A distributor may request a refund or credit from the direct sales
organization for taxes that are overpaid by the distributor. The direct sales
organization may then adjust its sales tax returns to reflect any refunds or
credits given its distributors.

Question 1: Since the above direct sales company (COMPANY A) is not charging
the Texas state sales tax on your purchases, and you cannot collect the Texas
state sales tax (you are ineligible for a sales tax permit, as an independent
seller of the direct sales company), is it unlawful for you to purchase and
sell COMPANY A products in Texas without COMPANY A (or yourself)
paying/collecting the Texas state sales tax?

Response: Yes. COMPANY A is required under the sales tax law to collect and
remit sales tax on sales of product to its independent distributors. Failure
to collect the sales tax does not relieve the direct sales company of its
responsibility for payment of the tax to the State of Texas. A direct sales
company that is not properly collecting tax will be brought into compliance
with the Texas sales tax law.

Question 2: As an independent distributor selling merchandise purchased from a
direct sales company, what are your lawful obligations under the Texas state
sales tax laws?

Response: An independent distributor is required to pay sales tax to the
direct sales company on purchases of taxable items. If the distributor is
unable to pay tax to the direct sales company, the distributor should report
and pay the tax to the Comptroller's office. See the response to question one.

Question 3: Are you in any way liable, as an independent direct sales
distributor, for collection and payment of the state sales tax on merchandise
purchased (to be resold to your own customers in the State of Texas) from a
direct sales company?

Response: We regard the direct sales company as the seller responsible for
collecting and remitting tax. A direct sales company that is not properly
collecting tax will be brought into compliance with the Texas sales tax law.
If sales tax is not collected by the seller, the seller or the purchaser owes
the tax until paid. See subsection (e)(1) of Rule 3.286. The Comptroller's
office will accept payments of tax from independent distributors who are unable
to pay tax to the direct sales company.

Question 4: Item (i) of Section 3.286, State Sales and Use Tax, requires that
any person selling taxable items must collect the Sales Tax.

Response: Independent distributors are required to collect the sales tax from
customers as a reimbursement for the tax they are required to pay the direct
sale company. If the sales price to the customer is less than the suggested
retail price, the distributor is allowed to get a refund or credit from the
direct sales company for overpaid tax.

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