TEXAS: The Sun Shines Bright

By Jeffrey A. Babener
  February, 1997

In a forward-looking piece of legislation, the State of Texas has done a great service to the direct selling industry. Texas has become the first state to formally recognize that a purchase by distributors for personal or family use constitutes as legitimate a retail sale as sales to nondistributors. This has been a bone of contention between the industry and regulatory authorities for many years.

In some cases, regulatory authorities have contended that counting personal consumption by distributors as retail sales constituted nothing less than headhunting fees for signing on new distributors.

Leading companies in the industry have always recognized purchases for personal or family use in reasonable amounts. The trends have also been good. New amendments to Canadian legislation recognize this approach. The State of California has recognized this approach in consent decrees. And now, Texas has become the first state to formalize this recognition in its multilevel legislation. "...the industry should give major applause to Texas for formulating understandable standards, and ... recognizing the legitimacy of personal use and consumption of products by network marketing distributors."
On a separate note, distributors and companies in the industry should be aware that Texas has now mandated a one-year, 90 percent buyback policy from date of purchase on inventory purchases by distributors.

A number of states with such legislation, such as Maryland, Massachusetts, Wyoming, Louisiana and Georgia, mandate varying degrees of buybacks by network marketing companies. Even Puerto Rico has such a statute. In the typical buyback legislation, companies are required to buy back inventory and sales aids at 90% of net cost to terminating distributors. Buyback periods range from 90 days to forever. There is probably plenty of debate in the industry about the appropriate length of time of the buyback. Many in the industry believe that distributors should reasonably know in 60-90 days if the opportunity is not for them.

The Texas rules parallel to a large extent buyback policies in many of the states with such legislation, as well as standards adopted by the Direct Selling Association. Under the new rules, companies must agree to buy back from terminating distributors inventory and sales aids in resalable condition for a period of 12 months from purchase at 90% of the net cost to the distributor. Upline commissions may not be deducted from the refund. Promotional items or products with seasonal or short lives are not subject to buyback if companies disclose this fact to distributors in advance.

As a final note, Texas repealed legislation which appeared to prohibit paying MLM commissions for the sale of services.

Although some in the industry may be critical of the 12-month buyback policy standard adopted by Texas, in general, the industry should give major applause to Texas for formulating understandable standards, and in particular, recognizing the legitimacy of personal use and consumption of products by network marketing distributors.

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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