Does an out-of-state company owe Utah sales tax on discount memberships it sells, on catalog/drop-shipped products, and does using independent contractors in Utah create nexus?

Plain-English summary

An out-of-state corporation with no Utah offices, property, or employees planned to sell (1) discount memberships through a growing network of Utah independent contractors, and (2) catalog products drop-shipped from manufacturers directly to customers. It asked the Commission three questions: is the membership sale itself taxable, is the catalog/drop-ship sale taxable, and how many Utah representatives would create nexus.

Discount memberships. The Commission applied the same rule used in other membership-card rulings: a discount card or membership sale is only taxable if it's sold by the vendor or retailer who actually deals in the goods or services the discount applies to. Since the corporation here wasn't itself providing the discounted goods and services (outside providers collected their own sales tax on those separate transactions), the membership sale itself wasn't taxable. But the Commission flagged an important caveat: if a Utah customer has to buy the membership specifically to get discounted access to the corporation's own goods (i.e., the catalog sales are tied to the membership), the corporation would then be treated as the vendor of those discounted goods — making both the membership and the underlying sales taxable, absent some other exemption.

Catalog/drop-ship sales. The taxability turns on the corporation's actual legal relationship with the manufacturers, which the Commission described as falling into one of two patterns:

• If the manufacturer is the true vendor and the corporation is merely its sales agent, the manufacturer is primarily responsible for collecting tax if it has Utah nexus — but if the corporation collects payments on the manufacturer's behalf, the corporation must also collect and remit tax, and the corporation's own Utah nexus (via its independent contractors) would create nexus for the manufacturer too.
• If the corporation is itself the vendor — buying wholesale from the manufacturer (an exempt resale purchase) and reselling to Utah customers, with the manufacturer merely drop-shipping on the corporation's behalf — the corporation must collect and remit sales tax on its own Utah sales, including the membership sales.

Nexus. Under § 59-12-107(5), a vendor has Utah sales tax nexus if it maintains a place of business, a stock of goods, regularly delivers property other than by common carrier or mail, or regularly leases/services property in Utah. The Commission held that using independent contractors to make sales in Utah is, by itself, enough to create nexus — there's no minimum number of representatives required. Even a small, growing handful of Utah-based independent contractors selling on the corporation's behalf triggers the collection obligation from the start.

What this means for you

Membership, discount-club, or MLM-style businesses

Keep your membership product genuinely separate from any goods you sell yourself. If members redeem their discount only with unrelated third-party retailers who collect their own tax, your membership sales stay untaxed. But bundle the membership with access to your own discounted products, and the whole thing — membership plus goods — becomes taxable.

Catalog and drop-ship sellers

Nail down your actual legal relationship with your manufacturer/supplier in writing. Whether you're an agent for the manufacturer or the true reseller changes who's on the hook to collect Utah tax, and whether your own Utah presence drags the manufacturer into nexus too.

Businesses using independent contractors to sell into Utah

Don't assume a small sales force avoids nexus. Utah treats any independent contractor regularly making sales here as sufficient by itself to create nexus — plan to register and collect from your first Utah sales agent, not after some threshold is crossed.

Common questions

Q: Is selling a discount membership taxable in Utah?
A: Not if the membership only unlocks discounts from unrelated third-party retailers who collect their own sales tax. It becomes taxable if the membership is tied to discounted access to the seller's own goods.

Q: Does drop-shipping catalog orders from a manufacturer create Utah sales tax obligations?
A: It depends on whether you're acting as the manufacturer's sales agent or as the true reseller buying wholesale and reselling — each structure assigns the collection duty differently.

Q: How many independent contractors does it take to create Utah nexus?
A: There's no fixed number — even one independent contractor regularly making sales in Utah on the company's behalf is enough to create nexus.

Q: Does this ruling apply to my company's membership or catalog sales program?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts. It can't be relied on as binding by anyone else, though it may carry weight if your facts closely match.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-107(5) (vendor sales/use tax collection duty tied to Utah nexus — place of business, stock of goods, delivery activity, or leasing/servicing activity)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-178.pdf

Original ruling text

96-178

Response January 8, 1996

Request

XXXXX

Franchise
Tax Auditing Department

210
North 1950 West

Salt
Lake City, Utah 84134

Dear
Sir or Madam:

We
have a client who has established a new business and may be making sales within
your state in the near future. We are
writing to request your opinion as to whether the sales will be subject to
sales tax in your state under the following circumstance.

Th
business has been incorporated in the State of XXXXX, and the State of XXXXX
will be its sole base of operations.
The corporation will at no time own or lease property within your state,
and will at no time have employees operating within your state. All sales will be made by independent
contractors who will not necessarily devote 100% of their time in selling the
corporation�s products. It is
anticipated that the corporation will only have an handful of independent
contractors selling the corporation�s product within your state. However, it is the corporation�s hope that
the number of independent contractors that sell the corporation�s product will
increase rapidly in the future.

The
product to be sold is a membership. Membership entitles the member to discount
prices on various goods and services.
The corporation has made arrangements with various providers for goods
and services to provide such discount to the members. The corporation itself will not be providing such goods or
services. Accordingly, with respect to
the actual sale of the goods or services themselves, the provider will collect
and remit the applicable sales tax.
Therefore, our first question is whether or not the sale of the
membership itself is subject to sales tax within your state.

The
corporation is also contemplating catalog sales to the public. The corporation would advertise products in
a catalog that would be requested by residents in your state. The catalog recipient would be able to
order products from the catalog directly from our client corporation, who would
act as a middleman between manufacturer and the purchaser, paying wholesale price
of or the merchandises and arrange for drop-shipping and the products from the
manufacturer to the purchase. Under
this arrangement, would our client be required to collect and remit sales tax
for sales made to its members in your state?

Our
second question relates to your state requirements with respect to nexus. Our question is whether or not the
corporation is required to collect and remit sales tax to your state given that
the taxpayer will not own or lease property within your state, or have
employees in your state. The taxpayer
will simply have independent contractors within your state making sales on
behalf of the corporation.

Please
give us your opinion as to the number of representatives that would be needed
in order to constitute sufficient nexus, requiring the corporation to begin
collecting and remitting sales tax in your state.

The
taxpayer wishes to take all steps necessary in order to properly comply with
your sales and income tax laws, and greatly appreciates your response to our
inquire. Should you determine that it
is necessary for the taxpayer to collect and remit sales tax, please provide us
with the applicable application forms needed in order to obtain a sale tax
number.

Please
direct your response to XXXXX at the above address and please feel free to call
if you have any questions or require addition information.

Very
truly yours,

XXXXX

NAME

ADDRESS

CITY
STATE ZIP

Advisory
Opinion - Application of sales tax to sales of memberships and to catalog
sales.

Dear
XXXXX,

We have received your request for
information pertaining to the application of sales tax to your client�s sales
in Utah. You asked whether memberships
entitling your customer�s clients to purchase items at discount prices are
subject to sales tax in Utah. You also
inquired about the taxation of mail order sales. Finally, you asked if your client has nexus for sales tax
purposes. We offer the following
guidance:

Taxation
of Memberships and mail order sales

The sale of a membership that
entitles the member to purchase items at discount prices from various retailers
is not subject to sales tax. Sales of discount
cards or memberships are only taxable if they are sold by the vendor or
retailer who deals in the goods or services to which the discount applies. If your client does not deal in the goods
and services to which the discount applies, we do not consider your client�s
sales of memberships to be taxable.

With regard to mail order sales, you
do not indicate whether the mail order sales are tied to the discount
memberships. Therefore, we caution you
that if a Utah customer must purchase a discount membership in order to
purchase items at a discount from your client, your client may be considered
the vendor of the discounted goods. In
that case, the sale of the membership and any sales of goods sold in this manner
are taxable in Utah unless a specific exemption applies.

Nexus:

Utah sales and use tax is the
liability of the purchaser. However,
the retail vendor (or the vendor�s agent) is responsible for collecting and
remitting the tax to the State of Utah if the vendor has nexus in Utah. Utah Code Section 59-12-107 (5) states, in
pertinent part:

(1) (a) Each vendor shall pay or collect and remit the
sales and use taxes imposed by this chapter if within this state the vendor:

(i) has or
utilizes an office, distribution house, sales house, warehouse, service
enterprise, or other place of business;

(ii) maintains a stock of goods;

. . .

(iv) regularly
engages in the delivery of property in this state other than by common carrier
or United States mail; or

(v) regularly
engages in any activity in connection with the leasing or servicing of property
located within this state.

A vendor has nexus in Utah for sales
tax purposes if it owns or leases property here; if it leases property to Utah
consumers; if it has sales agents here; or if it provides service or
maintenance for the items sold, either directly or through an agent. An agent or independent contractor with Utah
nexus is enough to create nexus for the vendor.

With regard to your client�s sales
of memberships, use of independent contractors in Utah creates nexus for sales
tax purposes. As to mail order sales,
you have not described the nature of the relationship between your client and
the manufacturers, but we assume that the relationships can be characterized in
one of the following ways:

(1)
The manufacturer is the vendor and your client is an agent who makes
sales on behalf of the manufacturer. In
this case, the vendor is ultimately responsible for collecting and remitting
sales tax if the manufacturer has nexus in Utah. However, if your client is responsible for collecting payments on
behalf of the manufacturer, your client must also collect and remit the sales
tax. If your client, as an agent for
the manufacturer, has Utah nexus, your client creates nexus for the manufacturer.

(2)
Your client is the vendor and the manufacturer makes drop shipments to
your client�s customers. In this case,
we would normally expect to see the manufacturer bill your client for the
sale. Your client would, in turn, bill
the customer. Your client�s purchase
would be considered an exempt purchase for resale, but your client would be
responsible for collecting and remitting the sales tax on its transactions with
Utah customers, including its sale of memberships in Utah.

The nexus requirements for income
tax purposes are somewhat different from the sales tax nexus standards. A publication explaining nexus is enclosed
for your information. Please let us
know if you have questions regarding your liability with regard to Utah�s
corporate income tax provisions.

For
the Commission,

XXXXX,

Commissioner