When a party-plan hostess or independent business owner uses sales-incentive credits to buy products, is Utah sales tax calculated before or after the credit is subtracted?

Plain-English summary

A direct-selling company using the "party plan" model — where an independent business owner (IBO) hosts a party at a hostess's home and takes orders from guests — asked how to calculate sales tax when a hostess or IBO uses sales-incentive credits instead of cash. Hostesses earn credits based on their guests' purchase volume, redeemable toward the hostess's own purchases; IBOs separately earn a 5% credit on guest sales that can only be applied toward "business supplies," not cash, products, shipping, or tax itself.

The Commission's answer turned on the company's existing multi-level marketing agreement with its Auditing Division — the kind of arrangement where the IBO doesn't need their own sales tax number because the company itself remits tax on the suggested retail price of goods sent to Utah, rather than the IBO collecting tax on resale.

Under that structure, when a hostess or IBO uses a credit toward product purchases, the Commission treats the credit as a form of payment, not a discount off the price. So tax is calculated on the full suggested retail price regardless of the payment mix: $100 cash, $100 in credits, or $50 cash plus $50 in credits all produce the same taxable amount — $100.

The rule flips for IBO purchases of "business supplies." Those aren't sold under the resale-oriented multi-level marketing arrangement — the company is making an ordinary retail sale directly to the IBO. In that context, a credit applied to the price works like a store coupon, actually reducing the price the tax is calculated on.

The Commission was explicit that this whole analysis depends on the company actually having a standard multi-level marketing agreement along the lines described — a different or nonstandard agreement could change the answer.

What this means for you

Direct-selling and multi-level marketing companies

Whether an incentive credit reduces your taxable sales price turns on what's being purchased and under what arrangement, not on how the credit was earned. Credits toward resale-model products stay in the tax base (treated as payment); credits toward supplies the company sells you directly at retail come out of the tax base (treated as a coupon).

IBOs, hostesses, and party-plan participants

Don't assume a "free" credit reduces what tax is owed on your order — for product purchases under a standard MLM setup, the company remits tax on the full suggested retail price no matter how you pay, credits included.

Accountants advising direct-sales clients

Confirm whether your client actually has (and is operating consistently with) a multi-level marketing agreement with the Auditing Division before applying this ruling's logic — the Commission flagged that a different or inconsistent agreement structure could yield a different tax treatment entirely.

Common questions

Q: If a hostess uses $100 worth of credits to buy a $100 item, is any sales tax due?
A: Yes — the Commission treats the credit as payment, not a discount, so tax is calculated on the full $100 suggested retail price just as if cash had been used.

Q: Does the same rule apply to an IBO buying business supplies with a credit?
A: No — for business supplies (a direct retail sale from the company to the IBO, not a resale-model product), the credit works like a coupon and reduces the price tax is calculated on.

Q: Does this depend on our specific agreement with the state?
A: Yes. This analysis assumes a standard multi-level marketing agreement with the Auditing Division; a different or inconsistent arrangement could produce a different answer.

Q: Can another direct-selling company rely on this ruling directly?
A: No — it's an advisory opinion based on this company's specific incentive-credit structure and its assumed multi-level marketing agreement. A company should confirm its own agreement terms and, if needed, seek its own guidance.

Citations and references

No statutes or administrative rule sections were cited by number in this ruling; the Commission's answer rests on the terms of the taxpayer's multi-level marketing agreement with its Auditing Division and the general sales-price/discount-vs-payment distinction.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/02-019.htm

Original ruling text

REQUEST LETTER

02-019

Response: 9/4/02

NAME

ADDRESS

Re: Request for Sales Tax Private Letter Ruling

Please be advised that I represent a direct selling company that is registered to collect and remit sales tax in your state.

My client sells products to independent business owners (IBOs) at wholesale plus shipping charges and pre-collects sales tax on the suggested retail price plus other taxable charges.

The IBOs generally sell the products using the party plan. The party plan method of selling is where the IBO holds a party at an individual's (referred to as the hostess) home. The hostess invites individuals to attend for the purpose of having the IBO display and take orders for the products. Sales tax is charged based on the shipping address provided to the company. This shipping address is typically the hostesses' address.

The IBOs receive profit from the difference between their cost and the selling price of the products, plus the bonus paid by the company based on their volume of sales.

As an incentive to hold a party, the hostess may receive credits based on the volume of purchases of the party guests. These credits may be applied to the sales price of the hostess's purchases.

Additionally, IBOs earn a premium of 5% of party guest sales in the form of a credit that can be applied to the purchase of business supplies at the suggested retail price. This credit cannot be exchanged for cash, applied to product purchases, or used to pay for shipping and handling or applicable sales tax.

Based on the above facts, my client respectfully requests a ruling on the following:

• When a hostess purchases products for her own use, is sales tax computed on the sales price before or after subtracting the credits earned?
• When an IBO purchases business supplies using credits to offset the retail price, is sales tax computed on the sales price before or after subtracting the credits earned?

Your prompt attention to this ruling request is greatly appreciated. If you have any questions regarding this request, please contact me.

RESPONSE LETTER

September 4, 2002

NAME

ADDRESS

Re: Sales tax of purchases from a multi-level marketer using incentive credits

Dear NAME,

You have asked what price your client should use to calculate sales tax when an IBO or a hostesspurchases goods from the company using credits granted as a sales incentive.

Based on information in your letter, we assume the company has a multi-level marketing agreement with the Tax Commission under which the IBO is not required to have a tax number and collect sales tax on the products they buy for resale. Instead, the company remits sales tax to the state based on the suggested retail price of goods the company sends to the IBO. Should the company not have such an agreement or has an agreement that is inconsistent with our description, our response might be different. (If this is the case, the company may pursue entering into such an agreement by calling NAME, Auditing Division, at (801) ###_####).

Under a multi-level marketing agreement, sales tax is due from the company on the suggested retail price of all goods (other than IBO �business supplies�) sent into Utah. A credit used by an IBO or hostess is considered to be a payment on the price of goods and not a reduction in the price of the goods. Accordingly, the company should remit sales tax calculated on the total suggested retail price before the value of the credits is subtracted. In other words, whether an IBO or hostess pays $100 in cash, uses $100 in credits, or uses $50 in credits and pays $50 in cash to purchase an item with a suggested retail price of $100, the company should remit sales tax based on a sales price of $100.

Unless the arrangement set forth in the multi-level marketing agreement specifically states otherwise, the company should not remit sales tax based on the suggested retail price as described above when the IBO purchases business supplies. In this case, the company is not selling items for resale under the multi-marketing agreement. Instead, it is making retail sales of these items. Accordingly, any discount to the hostess for business supplies, no matter how earned, appears to be like a store coupon and merely reduces the price of the product for purposes of calculating sales tax.

To reiterate, our response comes under the assumption that the company has entered into a standard multi-level marketing agreement with the Auditing Division. If this is not the case, our answer might be different. Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

02-019