Navigating U.S. tax obligations as a non-resident Amazon seller can feel like walking through a maze. The rules are complex, the terminology is dense, and the stakes are high.
Missteps can lead to unexpected tax liabilities, penalties, or even double taxation. To make matters more confusing, tax professionals often provide conflicting advice, leaving sellers unsure of how to proceed.
Many non-residents choose to form a U.S. Single-Member LLC (SMLLC) in states like Wyoming, hoping that this structure will allow them to file only Form 5472 and a pro forma Form 1120 for the LLC.
While this may be true sometimes, the reality is often more complicated. The determination of whether you owe U.S. taxes depends on a detailed analysis of your activities, including whether you have a U.S. Trade or Business (USTOB) and generate Effectively Connected Income (ECI).
Additionally, the applicable tax treaty may reduce or eliminate your U.S. tax liability if you are from a treaty country.
In this post, we’ll break down the key issues surrounding U.S. taxation for non-resident Amazon sellers, explore why opinions differ among tax professionals, and provide actionable insights to help you stay compliant while minimizing your tax burden.
Three Levels of Evaluation for Non-Resident Amazon Sellers
To understand your U.S. tax obligations, it’s helpful to think in terms of three levels of evaluation:
Level 1: No USTOB or ECI
You have no U.S. Trade or Business (USTOB) and no Effectively Connected Income (ECI) under U.S. tax law. This means your activities in the U.S. do not meet the threshold of being considerable, continuous, and regular, and your income is not effectively connected to a U.S. trade or business.
Example:
You sell on Amazon but do not use Amazon FBA or any U.S.-based warehouses, fulfillment centers, or logistics services. All products are shipped directly from outside the U.S. to U.S. customers, and you have no U.S. office, employees, or dependent agents. Additionally, your overall activities targeting the U.S. market are passive and limited in scope, reducing the likelihood of being engaged in a USTOB.
Filing Requirements:
In this scenario, you are only required to file:
- Form 5472: To report certain transactions between your U.S. LLC (if a disregarded entity) and its foreign owner.
- Pro forma Form 1120: To accompany Form 5472 as a reporting mechanism.
No additional tax filings are required if your activities do not rise to the level of a USTOB or generate ECI.
Note on Shipping and USTOB Determination:
- Shipping from Outside the U.S.:
If you ship products directly from outside the U.S. (e.g., from China or another foreign country) without using any U.S. infrastructure or services (e.g., warehouses, 3PL providers), it reduces the likelihood of being classified as a USTOB. However, this does not automatically exclude your income from being considered ECI if the income is connected to a trade or business in the U.S. - U.S.-Sourced Income Is Not Always ECI:
U.S.-sourced income alone is not enough to establish ECI unless the income is tied to a U.S. trade or business under the asset-use or business activities tests. - Amazon FBA and ECI:
Using Amazon FBA (which relies on U.S.-based warehouses and fulfillment centers) will likely create both USTOB and ECI, as the seller is engaging with U.S. infrastructure, and the income is materially connected to those activities. - ECI Requires a USTOB:
To classify income as ECI, the seller must first be engaged in a U.S. trade or business during the tax year. However, income may be treated as ECI in later years if it is tied to prior USTOB activities (e.g., sales of inventory or services).
Level 2: USTOB and ECI, but No U.S. Office or Employees
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- Your activities create a USTOB and generate ECI, but you have no U.S. office or employees.
- Example: You use Amazon FBA (storing inventory in U.S. warehouses) or have significant business activities in the U.S. (this is not a complete analysis).
- Filing Requirements: Form 1040-NR, Form 8833 (to claim treaty benefits, if applicable), and Form 5472.
- Tax Implications: U.S. taxes are owed unless reduced or eliminated by a tax treaty.
Level 3: USTOB, ECI, and a U.S. Office or Employees
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- Your activities create a USTOB and generate ECI; you have a U.S. office, employees, or dependent agents.
- Example: You have a physical office in the U.S., hire U.S. employees, or use dependent agents to conduct business in the U.S..
- Filing Requirements: Form 1040-NR, Form 5472, state tax returns, and payroll tax filings.
- Tax Implications: U.S. taxes are owed, and treaty benefits may not apply.
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By understanding these three levels, you can better assess your U.S. tax obligations and ensure compliance.
Understanding the Basics: Passive vs. Active Income
Before diving into the specifics of Amazon selling, it’s important to understand the two primary tax regimes that apply to non-residents:
- Passive Income Regime:
- Applies to income from investments, such as dividends, interest, and royalties.
- Subject to a flat 30% withholding tax, which may be reduced by an applicable tax treaty.
- No U.S. tax return filing is required if withholding covers the tax liability.
- Active Income Regime:
- Applies to income from business activities, such as selling products or services.
- Subject to U.S. tax only if the seller is engaged in a U.S. trade or business (USTOB) and generates effectively connected income (ECI).
- Requires filing a U.S. tax return (e.g., Form 1040-NR) and potentially paying U.S. taxes.
For Amazon sellers, the active income regime is the primary concern. The key question is whether your activities create a USTOB and generate ECI.
What Creates a U.S. Trade or Business (USTOB)?
The Internal Revenue Code (IRC) does not provide a clear, codified definition of what constitutes a U.S. Trade or Business (USTOB). Instead, the determination is based on a facts-and-circumstances test, which evaluates whether the seller’s activities in the U.S. are considerable, continuous, and regular.
Key Factors for USTOB:
- Physical Presence:
Having a U.S. office, employees, or dependent agents (e.g., an exclusive contractor authorized to act on behalf of the seller) is a strong indicator of USTOB. However, physical presence is not always required for a USTOB to exist under U.S. domestic tax law. - Use of U.S. Infrastructure:
- Storing inventory in U.S. warehouses (e.g., through Amazon FBA) establishes a significant connection to the U.S. market.
- Using U.S.-based suppliers, logistics providers, or fulfillment services can also demonstrate a USTOB, as these activities contribute to engaging in business within the U.S.
- Nature of Activities:
- The volume of sales to U.S. customers and the frequency and regularity of transactions in the U.S. market are critical factors.
- Activities that are substantial, continuous, and ongoing generally meet the threshold for USTOB.
Common Misconception: Dependent Agents
Some tax professionals argue that a seller has a USTOB only if they have a dependent agent in the U.S. (e.g., an employee or exclusive contractor). While dependent agents are relevant when determining a Permanent Establishment (PE) under a tax treaty, they are not the sole determinant of a USTOB under U.S. domestic tax law.
For Example:
A seller using Amazon FBA to store inventory in U.S. warehouses may still have a USTOB even without dependent agents because the seller’s activities in the U.S. are considerable, continuous, and regular. This is true regardless of Amazon’s status as an independent agent.
In this case, the seller’s use of U.S. infrastructure (e.g., warehousing, fulfillment services) and their consistent engagement with the U.S. market are sufficient to establish a USTOB, irrespective of treaty considerations.
Effectively Connected Income (ECI)
If a seller has a USTOB, the next step is determining whether their income is effectively connected to that business. ECI is subject to U.S. federal income tax at graduated rates (10%-37% for individuals, 21% for corporations).
Key Considerations for ECI:
- Source of Income:
- Income from sales to U.S. customers is generally considered U.S.-sourced income.
- Under the Tax Cuts and Jobs Act (TCJA), the sourcing of income from inventory sales is based on the place of sale (i.e., where the customer takes possession), rather than the title passage rule used prior to the TCJA.
- Connection to USTOB:
- Income is ECI if it is directly connected to the seller’s USTOB.
- Example: Income from sales fulfilled through Amazon FBA is considered ECI because it is directly tied to the seller’s use of U.S. infrastructure and regular business activities.
The Role of Tax Treaties
Tax treaties between the U.S. and other countries can reduce or eliminate U.S. tax liability for non-resident sellers. However, treaty benefits are not automatic and depend on specific circumstances. Sellers must file the appropriate forms to claim treaty benefits.
Key Treaty Provisions:
- Business Profits Article:
- Allows sellers from treaty countries to avoid U.S. tax on business profits unless they have a fixed base (for individuals) or a permanent establishment (PE) (for companies) in the U.S.
- Permanent Establishment (PE):
- A PE is generally created by:
- A fixed place of business (e.g., an office or warehouse).
- A dependent agent who habitually concludes contracts on behalf of the seller.
- Independent agents (e.g., Amazon) do not create a PE under most treaties.
- A PE is generally created by:
Important Note:
Even if a seller does not have a PE under a treaty, they may still have a USTOB and generate ECI under U.S. domestic tax law. In such cases, the seller must file Form 1040-NR and Form 8833 (to claim treaty benefits, if applicable).
Why Opinions Differ Among Tax Professionals
The complexity of U.S. tax law and limited guidance on certain issues (e.g., Amazon FBA) result in differing opinions. Here are some key areas of confusion:
- Overemphasis on Dependent Agents:
- Some professionals mistakenly focus on the absence of dependent agents, ignoring other activities that may create a USTOB, such as storing inventory in U.S. warehouses.
- Misunderstanding of Sourcing Rules:
- The TCJA changed the sourcing rules for inventory sales, but some professionals still rely on outdated title passage rules.
- Lack of Clarity on Amazon’s Role:
- While Amazon’s status as an independent agent does not create a dependent agent relationship, the seller’s use of Amazon FBA can still create a USTOB if the seller’s activities are substantial, continuous, and regular.
- Incomplete Analysis of Treaty Benefits:
- Some professionals fail to fully evaluate how tax treaties may reduce or eliminate U.S. tax liability for sellers from treaty countries.
Practical Steps for Non-Resident Amazon Sellers
To ensure compliance and minimize tax burdens, non-resident sellers should take the following steps:
- Determine if You Have a USTOB and ECI:
- Evaluate whether your activities (e.g., using Amazon FBA) create a USTOB and generate ECI.
- File the Required Forms:
- If you have a USTOB and ECI, file Form 1040-NR and Form 8833 (to claim treaty benefits, if applicable).
- Even if no taxes are owed due to treaty benefits, you must still file these forms to remain compliant.
- Consider State Tax Obligations:
- In addition to federal taxes, you may have state tax obligations, such as sales tax registration, collection, and remittance.
- Seek Professional Advice:
- Consult a tax professional experienced in cross-border e-commerce to ensure compliance and minimize your tax liability.
The Importance of Compliance in a Changing Landscape
With the increased focus on cross-border transactions and non-resident taxpayers, non-resident Amazon sellers who have only filed Form 5472 and a pro forma Form 1120 without a detailed analysis of their activities may face increased scrutiny.
- If you are from a treaty country where the treaty reduces your U.S. tax liability to zero, filing the additional forms (e.g., Form 1040-NR and Form 8833) ensures compliance and minimizes your audit risk.
- Filing these forms not only demonstrates good faith compliance but also protects you in the event of IRS scrutiny.
Disclaimer
This information is for informational purposes only and is not designed to provide legal or tax advice on your individual situation. It does not address whether a U.S. Single-Member LLC disregarded entity requires you to file specific U.S. tax returns or pay U.S. taxes. Nor does it determine whether a U.S. tax treaty would reduce your tax liability.
We strongly recommend consulting with a U.S. tax professional or CPA experienced in cross-border e-commerce.
At NCP, we collaborate with carefully vetted CPAs to help you navigate these complexities and minimize your tax burden.
