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