For an independent distributor of prepaid 'Discount Redemption Vouchers,' does the distributor need a sales tax permit, what's the tax base on non-fundraiser sales, and are fundraiser sales through booster clubs/churches/civic groups tax-exempt?

Plain-English summary

An independent distributor for a direct-sales company (COMPANY A) purchases "Discount Redemption Vouchers" at prices that vary by quantity, then resells them at up to (but often well below) the suggested retail price. A voucher purchaser can redeem it for a shipping/handling fee (plus sales tax, if a Texas resident) and receive trading cards, postcards, greeting cards, calendars, or business cards. The distributor sells some vouchers to individual customers and others through fundraisers — using volunteers from athletic booster clubs, band booster clubs, churches, or civic organizations to sell vouchers, with proceeds split between the sponsoring organization and the distributor. The distributor asked three questions, building on an earlier related letter (9806569L):

Question 1 — Does the distributor need its own sales tax permit? No. COMPANY A itself, as the direct sales organization, is the retailer legally responsible for collecting and remitting sales tax on voucher sales made through its independent distributors, based on the vouchers' suggested retail selling price.

Question 2 — For regular (non-fundraiser) sales to individuals, what amount is tax calculated on? Tax is collected on the price actually charged for the vouchers. If the actual selling price differs from the suggested retail price, COMPANY A can adjust its taxable sales figures on its own sales tax report based on periodic adjustment reports from its distributors, and COMPANY A can refund or credit a distributor for tax it overpaid.

Question 3 — Are fundraiser sales tax-exempt? Generally no. Exempt organizations are normally required to collect sales tax on taxable-item sales just like anyone else. A narrow carve-out exists: a religious, educational, or charitable organization, or one exempt under IRC § 501(c)(3), (4), (8), (10), or (19), may hold two one-day tax-free sales or auctions per calendar year — but to qualify, the sale during that 24-hour period must be held exclusively by the qualifying exempt organization itself. Sales made under an arrangement that splits proceeds between the exempt organization and an individual distributor do not qualify for this exemption. So the fundraiser sales described here stay taxable, with COMPANY A collecting tax based on the suggested retail price (subject to the same adjustment mechanics as Question 2). If instead an exempt organization buys vouchers to resell entirely on its own account during its genuine one-day tax-free sale (keeping all the proceeds, no split with the distributor), it can give the distributor a properly completed exemption certificate; the distributor forwards that certificate to COMPANY A to request a refund or credit for the tax paid on those items, and COMPANY A must keep the certificate on file as documentation.

What this means for you

Direct-sales and MLM distributors

You typically don't need your own sales tax permit if your parent company (the direct sales organization) is legally responsible for collecting and remitting tax on your sales — confirm that arrangement with your company. If you run fundraisers through third-party organizations with a proceeds split, don't assume those sales are tax-exempt just because the partner organization is a nonprofit — the split itself disqualifies the one-day tax-free sale exemption.

Booster clubs, churches, and civic organizations running fundraisers

To actually use your two annual one-day tax-free sale opportunities, the sale must be conducted exclusively by your organization with no proceeds-splitting arrangement with an outside distributor or vendor. A commission/split-proceeds fundraiser model (common with direct-sales voucher/product programs) does not qualify, even though your organization is otherwise tax-exempt.

Accountants and tax professionals

This letter is a useful companion piece to other voucher-taxability letters in this line — it adds the permit question (parent company remains the collecting retailer) and works through the one-day tax-free sale mechanics in detail, including the exemption-certificate/refund path for a genuine (non-split) exempt-organization purchase.

Common questions

Q: Does an independent distributor need its own sales tax permit to sell vouchers?
A: No, per this letter — the direct sales organization (parent company) is the retailer responsible for collecting/remitting tax.

Q: Are fundraiser sales through a booster club or church exempt from sales tax?
A: Generally no, per this letter, when proceeds are split between the exempt organization and the distributor — that arrangement doesn't qualify for the one-day tax-free sale exemption, which requires the sale be held exclusively by the exempt organization itself.

Q: How many one-day tax-free sales can an eligible exempt organization hold per year?
A: Two, per this letter, for religious/educational/charitable organizations or those exempt under IRC § 501(c)(3), (4), (8), (10), or (19) -- but only if conducted exclusively by the organization with no proceeds split.

Q: Can an exempt organization ever buy vouchers tax-free?
A: Yes, per this letter, for its own genuine one-day tax-free sale (keeping all proceeds itself), by giving the distributor a proper exemption certificate.

Citations and references

Statutes and rules:

• 26 U.S.C. § 501(c)(3), (4), (8), (10), or (19) (categories of exempt organizations eligible for the one-day tax-free sale exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9808714L

Original ruling text

August 4, 1998

Dear Mr. **:

Thank you for your letter concerning your independent distributorship from
COMPANY A and your questions regarding a taxability letter (9806569L).

Situation: You purchase from COMPANY A "Discount Redemption Voucher's" for
prices that vary depending on the quantity purchased. You then can resell the
vouchers for an amount not to exceed the stated suggested sales price. Most of
the vouchers will be sold at substantial discounts. The purchaser may then
either redeem the voucher for $** for shipping and handling plus
sales tax, if redeemed by a Texas resident. The vouchers are redeemable for
trading cards, postcards, greeting cards, calendars or business cards. The
number of items the end purchaser receives depends on which vouchers are
purchased.

You purchased this business because of the potential sales to organizations
that may ordinarily be exempt from sales tax in the form of fund-raisers.
Fund-raisers consist of using volunteers from athletic booster clubs, band
booster clubs, churches or civic organizations to sell the Discount Redemption
Vouchers for a stated amount, $** each for example. The proceeds
from the sales would then be split between the sponsoring organization and
myself.

Other sales may consist of bulk sales of the above products. The costs and
sales proceeds will depend on the particular item purchases and the quantity
desired.

Question One: Are you required to apply for a sales tax permit?

Response: No. As a direct sales organization, COMPANY A is the retailer
responsible for collection and remittance of sales tax on sales of Discount
Redemption Vouchers by its independent distributors. COMPANY A must collect
sales tax from the distributors based on the suggested retail selling price of
the vouchers.

Question Two: If you are required to collect sales tax, on those sales to
individuals that do not involve fund-raising, what amount do you use to
calculate the tax?

Response: You must collect sales tax on the price you charge for the Discount
Redemption Vouchers. If the actual selling price is different from the
suggested retail selling price, COMPANY A is allowed to adjust the taxable
sales reported on its current sales tax report based on adjustments reported
periodically by its distributors. COMPANY A is allowed to refund or credit
tax overpaid by a distributor.

Question Three: Are the sales under fund-raisers taxable? Is the agreed to
price of $** the amount on which taxes would be collected if they
are taxable.

Response: Exempt organizations are generally required to collect sales tax on
sales of taxable items. A religious, educational, charitable organization, or
an organization exempt under Internal Revenue Code, Section 501(c)(3), (4),
(8), (10), or (19) may hold two one-day tax-free sales or auctions each
calendar year. For sales during a
consecutive 24-hour period to be exempt, the sale must be held exclusively by
the qualifying exempt organization. Sales by exempt organization with
agreements to split proceeds with individuals are not exempt under the sales
tax law. COMPANY A must collect sales tax from its distributor based on the
suggested retail selling price. Any adjustments in the selling price should
be handled as explained in the response to question two above.

An exempt organization purchasing taxable items for its own use or to sell
during its one-day tax-free sale (i.e., exempt organization cannot share
proceeds with the distributor) may give the distributor a properly completed
exemption certificate. In that case, the distributor does not need to collect
tax from the exempt organization. The distributor may then forward a copy of
the exemption certificate to COMPANY A and request a refund or credit for the
tax paid on items sold to the exempt organization. COMPANY A must keep the
exemption certificate in its records as documentation.

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