How does a direct sales/multi-level marketing organization collect Texas sales tax on its independent distributors' sales, and are sales the distributor makes to customers in Mexico exempt?

Plain-English summary

Someone considering becoming an independent distributor for a direct sales/multi-level marketing company (identified in the Comptroller's records as Dri-Kleen, Inc., doing business as Enviro-Tech International) asked how Texas sales tax works for distributor sales, including sales to customers in Mexico.

The key structural point: the direct sales organization itself, not the individual distributor, is responsible for collecting and remitting Texas sales tax on distributor sales — distributors of direct sales organizations aren't issued their own sales tax permits (Rule 3.286). Depending on whether the distributor takes orders before or after purchasing from the company, the organization collects tax either from the order paperwork or based on the suggested retail price at the distributor's local tax rate, with periodic reconciliation reports. Items a distributor buys for personal/business use (own-use products, sales aids, prizes for customers) are taxed on the organization's actual price to the distributor.

On the Mexico question: sales to Mexico are exempt from Texas tax, but only if the direct sales organization has proof of export as described in Rule 3.323 — typically a shipping company's bill of lading showing a Mexico destination (if the distributor ships the goods) or the company's own export records (if the company ships directly). Without that documentation, the exemption doesn't apply and any tax collected is refunded/credited to the distributor only once proof is supplied.

What this means for you

Independent distributors of direct sales/MLM companies

You generally won't hold your own Texas sales tax permit — your parent organization is the one legally responsible for collecting and remitting tax on your sales. If you ship products to customers in Mexico, keep a bill of lading or comparable export documentation; without it, the sale isn't treated as tax-exempt.

Direct sales/MLM companies structuring distributor tax collection

Your collection method depends on your order-flow timing (pre-purchase vs. pre-order), and you must track and reconcile local-jurisdiction sales through periodic distributor reports. Any tax collected from a distributor that isn't actually due must be refunded or credited.

Accountants and tax professionals

A clean illustration of how Rule 3.286's distributor-permit exclusion shifts sales tax compliance up to the parent organization, paired with the standard export-exemption documentation requirement (Rule 3.323) applied to a distributor-shipped cross-border sale.

Common questions

Q: Do individual distributors of a direct sales company need their own Texas sales tax permit?
A: No. Sales tax permits aren't issued to distributors of direct sales organizations; the organization itself collects and remits the tax.

Q: Are a distributor's sales to customers in Mexico exempt from Texas sales tax?
A: Yes, but only with proof of export — such as a bill of lading showing the shipment's Mexico destination — documented under Rule 3.323.

Q: What happens if the direct sales organization already collected tax on a sale that turns out to be an exempt export?
A: The organization should refund or credit the distributor once acceptable proof of export is provided.

Q: Can I rely on this letter for my own distributorship?
A: No. It's based on the specific facts submitted and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286, subsections (a)(3) and (b)(3) (Seller's and Purchaser's Responsibilities)
• 34 Tex. Admin. Code Rule 3.323 (Imports and Exports)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9909685L

Original ruling text

September 15, 1999

To: **

Subject: Sales Tax

Dear Mr. **:

Thank you for your e-mail concerning becoming an independent distributor for a
company named Enviro-Tech International of Las Vegas, Nevada.

Our records show the Nevada corporation as Dri-Kleen, Inc. A direct sales
organization, such as Dri-Kleen, is responsible for the collection and
remittance of tax on the sales of products by its independent distributors.
Sales tax permits are not issued to the distributors of direct sales
organizations. See subsections (a)(3) and (b)(3) of Rule 3.286, Seller's and
Purchaser's Responsibilities. Direct sales organizations are told to collect
sales tax as follows:

If the distributor takes orders before purchasing from the company, the order
blank should indicate the amount of tax due and to which local taxing
jurisdictions it should be allocated. The direct sales organization should
collect and remit the appropriate taxes from copies of the orders.

If the distributor purchases the items before the customer's order is taken,
the direct sales organization should collect and remit the amount of tax based
on the suggested retail sales price and the tax rate in effect for the
distributor's location. Periodically, 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. The
direct sales organization's sales tax return should reflect the compilation of
these reports and the regular sales for that reporting period. Any amount of
tax the direct sales organization collects from distributors which is not due
should be refunded or credited to them.

All sales of items to a distributor for personal or business use should have
tax computed on the direct sales organization's actual price to the distributor
and at the rate of tax for the distributor's location. Examples of these items
include products for the distributors own use, sales aids, and prizes given
away to customers.

In regards to the sales to Mexico, these sales are exempt from Texas tax
provided the direct sales organization has proof of export from its distributor
as explained in Rule 3.323, Imports and Exports. For example, when you
purchase products from the direct sales organization and then ship the products
to customers in Mexico, you should provide as proof of export the shipping
company's bill of lading listing the products and showing a destination into
Mexico. There are other ways to document an export as explained in subsection
(c) of the rule. The company may then refund or credit you the Texas sales tax
as explained above. If the direct sales company ships the products directly to
Mexico, it should already have proof of export in its records and exempt the
sale from Texas tax.

The rules I mentioned are found on the Window on State Government web site at
. After clicking on "Texas Taxes," click on "Current
Tax Rules" to get to the Comptroller's rules. You will want to click on "Tax
Administration" and then on "State Sales and Use Tax" to find the sales tax
rules.

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