One of our distributors resold product to a customer in Michigan, and a separate distributor sells to a retail store with its own storefront in a mall. In both cases the distributor already paid us Texas tax up front on the product. How do we handle refunding or crediting that tax without double-paying the state?

Plain-English summary

A direct sales/multi-level marketing company asked how to handle two distinct refund-or-credit situations involving its independent distributors, both of which involve the distributor having already paid Texas tax to the company up front on product that turns out not to belong on the Texas tax rolls.

Situation 1 — a distributor resold product to a customer in Michigan. If the distributor shipped or delivered the product to that out-of-state customer, the sale is exempt from Texas state and local tax. The distributor can request a refund from the company for the tax it already paid on that product. The easiest way for the company to recoup that money: take a credit on its current sales tax return by simply adjusting the reported "taxable sales" figure — no supporting documentation needs to be filed with the return itself (attaching it just slows down processing, per Rule 3.338 on allowance of tax paid to suppliers). Instead, the company should keep the distributor's refund request (a letter or the company's own internal form stating the grounds) in its own records under Rule 3.325(a)(4) and (b), and the distributor should separately keep the shipping/delivery documents proving the out-of-state sale.

Situation 2 — a distributor sells to a retailer with an actual storefront (e.g., a GNC-style store in a mall or shopping center), which resells the product at retail. The distributor already paid tax on the suggested retail price and gets reimbursed for that tax when billing the retailer. Here, the distributor can simply tell the retailer to take its own credit for the tax paid, when the retailer files its current sales tax return (again under Rule 3.338) — the retailer keeps the receipt showing tax was paid to the distributor as its documentation. This two-step credit chain (distributor credits itself via the company; retailer credits itself directly) is what prevents the State of Texas from collecting the same tax twice on the same product.

What this means for you

Direct sales / MLM companies

Build an internal process for distributors to request refund/credit for tax paid on products later shown to be out-of-state sales, and recoup that amount via a simple "taxable sales" adjustment on your own return rather than a separate refund filing — but keep the distributor's refund request and the distributor's proof of interstate shipment in your records in case of audit.

Independent distributors selling to storefront retailers

If you've already paid tax on the suggested retail price and are passing the retailer's reimbursement through, you don't need to route a refund back through the company — you can tell the retailer to take its own credit directly on its next return, using its receipt as documentation.

Retailers with a mall or shopping-center storefront buying from a distributor

Keep the receipt showing tax was already paid to your distributor; that's what lets you take a credit on your own sales tax return instead of the same product's tax being collected again when you resell it.

Accountants and tax professionals advising direct sales networks

This letter maps two distinct but related credit mechanics under Rule 3.338/Rule 3.325 — a company-level credit for an out-of-state resale, and a retailer-level self-credit for a paid-forward suggested-retail-price tax — both designed to avoid double taxation on the same underlying sale.

Common questions

Q: If a distributor ships product out of state, is that sale taxable in Texas?
A: No — it's exempt from Texas state and local tax, and the distributor can seek a refund of any Texas tax already paid on that product.

Q: How does the company recoup a refund it pays to a distributor?
A: By taking a credit on its own current sales tax return (adjusting reported taxable sales) rather than filing a separate refund request with documentation attached.

Q: What should the company keep in its records to support that credit?
A: The distributor's refund request (letter or internal form) stating the grounds, per Rule 3.325(a)(4) and (b); the distributor should separately keep shipping/delivery documents proving the out-of-state sale.

Q: Does a retailer buying from a distributor need to go back to the manufacturer/company for its tax credit?
A: No — the retailer can take its own credit directly on its own sales tax return under Rule 3.338, using the receipt showing tax paid to the distributor as documentation.

Q: Can I rely on this letter for my own direct sales company's refund procedures?
A: No. This opinion is based on the facts submitted, and other facts, though similar, may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.338 (allowance of tax paid to suppliers)
• 34 Tex. Admin. Code Rule 3.325(a)(4) and (b) (refunds)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9903256L

Original ruling text

March 10, 1999

To: **

Subject: Sale of Product by an Independent Distributor to another State

Dear Ms. **:

Thank you for your e-mail and our recent phone conversation concerning a
distributor of COMPANY A who resold the product in Michigan.

If the distributor shipped or delivered the products to a customer in Michigan,
the products are exempt from state and local taxes in Texas. The distributor
may request a refund from your company of tax paid on products that the
distributor shipped or delivered into another state. The easiest way for your
company to recoup the tax refunded to the distributor is to take a credit when
filing a current sales tax return. You simply adjust the reported "taxable
sales" on the return. No supporting documentation is required to be filed with
the return because this merely slows down the processing of the return. See
Rule 3.338 concerning allowance of tax paid to suppliers.

The refund request (either a letter from the distributor or your own internal
form) from the distributor that states the grounds for the refund should be
kept in your records as supporting documentation. See Rule 3.325(a)(4) and (b)
concerning refunds. The distributor should keep the shipping or delivery
documents that show the products were sold in another state in his or her
records.

You may access sales tax rules from our Window on State Government web site at
. Click on "Texas Taxes" and then on the link to the
"Current Tax Rules." Under Chapter 3, click on "Tax Administration." Under
Subchapter O, click on "State Sales and Use Tax." You will find Rule 3.325 and
Rule 3.338 listed with the other sales tax rules.

In our phone conversation you brought up another situation, you have a
distributor who is selling the product to a retailer (such as a GNC store) with
a storefront in a shopping mall or shopping center. The retailer resells the
product at the store. The distributor has already paid tax on the suggested
retail price of the product and is being reimbursed for the tax when charging
the retailer for the product. The distributor may tell the retailer to take a
credit for the tax paid for product when the retailer files a current sales tax
return. See Rule 3.338. The retailer should keep the receipt showing tax was
paid to the distributor to document the reason for taking the credit. This
procedure will prevent the State of Texas from getting the tax twice.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

I hope this information helps. If you have further questions, please e-mail me
at [email protected], or you may reach me by phone at 1-800-531-5441,
ext. 5-0030.

Sincerely,

David Somerville
Tax Policy Division