99-025

Response August 23, 2000

REQUEST LETTER

99‑025

September 1, 1998

Dear Tax Research & Analysis;

COMPANY sells nutritional, dietary, and skin care products through a multi-level network of independent distributors. We are considered an "MLM" or multi-level marketer such as COMPANIES, etc. Our physical location is in CITY, STATE. We charge tax based on where we ship to. COMPANY files one Utah state sales/use tax return rather than each distributor filing a return with Utah.

1). Distributors will renew their status annually. The annual renewal fee of $$$$$ will be due on the anniversary of their enrollment date. This fee will entitle the distributor to a one-year subscription to a monthly newsletter, as well as distributor support services.

2). We will charge the distributors a shipping and handling charge. The charge will be based on the type of purchase - cans or cases of product. The cans of product ordered will have a % percent shipping and handling charge with a minimum charge of $$$$$. The cases of product ordered will have a # percent shipping and handling charge. Orders will be shipped UPS ground. If the order is lost in transit, the distributor will contact COMPANY and we will contact UPS to file a claim.

We need a letter ruling or binding opinion as to whether the above are taxable or exempt based on your state=s tax laws, regulations, etc. A response in letter form is preferred. My fax number is ##### or my e-mail address is #####.

If you need additional information for your determination of taxability, please call me at #####. Thank you.

Sincerely,

RESPONSE LETTER

August 23, 2000

RE: Request for Advisory Opinion Concerning Annual Renewal Fees and Shipping Charges

Dear NAME,

We have received your request for an advisory opinion concerning the taxability of certain charges you impose upon your distributors in Utah. Specifically, you ask if amounts charged for annual renewal fees and shipping fees are subject to sales tax in Utah.

Annual Renewal Fees. From your description, the annual renewal fee paid by the distributor entitles that distributor to a monthly newsletter and support service. Although you have labeled these charges Aannual renewal fees,@ we look beyond that label to examine the underlying nature of the transaction. What the distributor is actually purchasing is a monthly newsletter and support services.

Utah Code Ann. '59-12-104(17) specifically exempts from taxation the sales of newspapers or newspaper subscriptions. To be classified as a newspaper for purposes of this exemption, Utah Admin. Code R865-19S-65(A)(2) requires that the Anewspaper@ be published at short intervals, daily, or weekly, be intended for circulation among the general public, and contain matters of general interest and report on current events. It is assumed that your company=s newsletter will contain matters relating to your company and products, not matters of general interest and current events. Also, the intended audience for your newsletter is your distributors, not the general public. Lastly, it is distributed monthly, not daily or weekly. For these reasons, your newsletter does not qualify as a Anewspaper@ for purposes of the sales tax exemption. Accordingly, the annual renewal fee represents the sale of a taxable newsletter and, thus, is a taxable transaction.

Shipping and Handling Charges on Shipments Intended for Resale. You have identified your company as a Amulti-level marketer@ that sells its products to independent distributors located in Utah. Instead of the independent distributors individually collecting and remitting sales tax on their sales to the final consumers, your company collects and remits one Utah sales and use tax return based on tax you collect from your distributors at the time they make their purchases from you.

The current Multi-Level Marketing Sales Tax Agreement (copy enclosed) used by the Tax Commission specifically requires a multi-level marketer to remit sales tax that is Acomputed on the suggested retail sales price of products based on [a company=s] price list.@ As a result, sales tax is collected on a price that theoretically includes all costs associated with a product, including its shipping and handling costs. To charge sales tax on both the suggested retail sales price and the shipping and handling costs charged to the distributor could result in double taxation of the shipping and handling costs.

In addition, your company is acting as an agent for its independent distributors when it collects and remits the sales tax on their behalf. Thus, it is the sales by the distributor to the final consumer that is the taxable transaction. There are no direct shipping and handling charges paid by the final consumer. The shipping and handling charge is part of the transaction between your company and its distributors, and when the items are being purchased by the distributor are for resale, the resale exemption applies to any associated shipping and handling charge. For these reasons, you should not charge sales tax on the shipping and handling charges you impose upon your distributors on shipments that are intended for resale.

However, should your distributors charge the final customers a price that is higher than the suggested retail price (on which sales tax should already be paid by your company), it will be assumed that the additional price that is in addition to the suggested retail price reflects, at least in part, the shipping and handling charge that your company has charged its distributors. In this situation, your company should collect and remit sales tax on the shipping and handling fees charged to your distributors.

Shipping and Handling Charges on Shipments NOT Intended for Resale. On the other hand, should you sell product directly to your distributors that is not intended for resale, the taxable transaction occurs between your company and the distributor, who is considered the final consumer. In this situation, sales tax is also due on the shipping and handling charges, unless certain conditions as detailed below are met. Section 59-12-104(16) provides an exemption from sales tax on intrastate movements of freight by common carrier. Interstate shipments are treated similarly. To qualify for the exemption, Utah Admin. Code R865-19S-71 requires that the transportation charges satisfy the following conditions:

1. Shipment must take place by means of common carrier;

2. Charges must be segregated and listed separately;

3. Charges must reflect the actual cost of shipping the particular tangible personal property by common carrier; and

4. Shipment of the tangible personal property must take place after passage of title.

Your company imposes a shipping and handling charge of either $4.50 or a certain percentage of the total product price. In either instance, the shipping and handling charge does not reflect the actual cost of shipping the particular product purchased by the distributor, and the third criterium is not met. Accordingly, even if all other criteria are met, the shipping and handling charge does not qualify for the exemption and is subject to taxation when the sale to the distributor is not intended for resale.

Please contact us if you have any other questions.