VTAXPER64700 - Particular trades: direct selling or party plan sales: agent or principal - how to decide
When the goods pass from distributor to dealer, it is important to determine whether that dealer has actually bought and sold the goods as principal, or whether he is acting as a selling agent for the distributor. A well informed decision can only be made if you are in possession of all relevant information. You should therefore start by consulting the Information to obtain section below, which gives details of the information which you will need. You should then proceed to the section on Factors to consider below, which explains which factors are particularly important when considering that information; and finally, consult Accounting consequences below, where the accounting consequences of your decision are explained.
Information to obtain
Before attempting to determine whether an unregistered dealer in direct or party plan sales is an agent or a principal, you must assemble a package which includes the following information, where available:
- written contracts or agreements;
- letters and rules of conduct;
- brochures and price lists;
- advertisements for distributors or dealers;
- order forms;
- delivery notes;
- receipts; and
At this stage, it is also worthwhile contacting the officer who controls the manufacturer. He may already be aware of the status of links lower down the chain because of previous enquiries; or if not, he may have ready access to documentation which the trader might be unwilling or unable to provide.
Factors to consider
You need to test your package of information against four principal factors: title, value, separation, and nature and value. Points to consider are as follows.
- Title A dealer must obtain title to the goods if he is buying and selling those goods as principal. If the dealer has title, he would be expected to replace goods at his own expense, issue refunds to customers, and bear bad debts. If these responsibilities rest with the distributor, these are indications that the dealer is merely a selling agent. Sometimes the agreement or contract may include a Romalpa clause, which provides that the goods remain the property of the distributor until sold. This is actually an indication that the dealer is a principal; such a clause would not be necessary if the dealer were a selling agent, as it would merely be stating the obvious.
- Value If he is a principal, the dealer has no obligation to inform the distributor of the to calculate how much the dealer must pay for the stock.
- Separation If the dealer is a selling agent, his fee must be identifiable and known to the distributor. This is not possible if the dealer is able to order stock in advance in anticipation of a price increase. Such arrangements would amount to the dealer being allowed to increase his ‘commission’ without the consent of the distributor, and are thus not compatible with agency.
- Nature and value If the dealer is a principal, he must have freedom to set the retail selling price of the goods. Arrangements whereby the dealer informs the distributor of the total takings at the hostess party and is then paid a percentage of that figure indicate that the dealer is a selling agent of the distributor.
The main case to address the agent/principal aspects of direct selling is P and R Potter ( STC 290/  STC 45). In this case, the Court of Appeal divided the facts into three types of pointer - pointers towards agency, neutral pointers, and pointers toward a relationship of two principals - and found that most pointers were in favour of a relationship of two principals. This case provides a real example of the above factors being weighed up and judged.