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U.S. Tax Levels: What You MUST Know Before Selling in the U.S.

  • U.S. tax laws are complex, and most non-resident sellers either misinterpret them or overlook key compliance steps, leading to unexpected tax bills, penalties, or IRS audits.
  • Understanding U.S. Tax Responsibilities for Foreign Sellers
[U.S. TAX MASTER CLASS] 4 U.S. Tax & E-Commerce Compliance Traps
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Your U.S. tax responsibilities depend on how your business operates, including:

Start with the gatekeeper question:

Do you have a U.S. trade or business (USTB)?

You are generally taxable on business profits in the U.S. only if you are USTB.
That usually requires one of the following:

  • You use U.S. space to run the business (returns room, office, kitting area).
  • A U.S. dependent agent acts for you and habitually concludes contracts or grants concessions.
  • You or your staff regularly perform core business functions in the U.S.
Important guardrail:

Using independent providers (Amazon FBA or a true 3PL) is not the same as having your own U.S. office.

If USTB exists, then check ECI and source:

  • Purchased goods are usually U.S.-source if title passes in the U.S.
  • Produced goods sourced by the place of production.
  • If a U.S. office materially participates, special rules can attribute sales to that office.


Amazon Compliance Alert:
Amazon will NOT let you change your tax interview from a foreign entity to a U.S. company unless you correctly update your legal structure. If, in this example, you form a Single-Member LLC (Disregarded Entity), Amazon will list the owner’s name, the foreign entity, not your new single-member LLC, on your seller profile page.

There are three levels of U.S. tax responsibility based on the structure of your business and operational presence. This is a complex subject that requires consulting with a tax professional to ensure compliance and avoid unexpected U.S. tax liabilities.

✔ No U.S. suppliers, inventory, or fulfillment centers.
✔ Ships directly from your home country to U.S. customers.
✔ No U.S. employees or physical operations.

Risk: Many sellers assume they are “exempt” from U.S. taxes, but if any part of their business is considered U.S.-sourced income, they may still have reporting requirements.

  • Do you actually use any U.S. space (returns room, office, kitting), or is all fulfillment via an independent FBA/3PL?
  • Does anyone in the U.S. bind you (accept orders, grant concessions) as a dependent agent, or are all providers truly independent?
  • Do you or staff regularly work in the U.S.? If yes to any of these, USTB risk increases; inventory at FBA alone does not create USTB/ECI.

If USTB is possible, ask: are you a reseller where title passes in the U.S. (often U.S.-source) or a producer with production outside the U.S. (generally foreign-source unless a U.S. office materially participates)?

Treaty resident? You can be USTB yet have no PE; that usually means $0 federal tax if you file 1040-NR or 1120-F with Form 8833.

Still required: Form 5472 with pro-forma 1120 for foreign-owned single-member LLCs with owner transactions, and state filings where inventory or sales create nexus.

Why some CPAs still file 1040-NR (often with 8833): risk tolerance. Filing starts the statute, preserves deductions, and reduces notices if mid-year facts drift.

Leased office, warehouse, or fixed business location in the U.S.
✔ Has employees, contractors, or agents working in the U.S.
✔ Manages part of its business directly from the U.S.

Risk:
Once your business has a physical presence or employees in the U.S., you are fully subject to U.S. taxation,  no exceptions.

Common Misconceptions:
“If I use an LLC, I can avoid U.S. corporate tax rules.”
“Having a remote team in the U.S. doesn’t create a tax issue.”
“Tax treaties will eliminate my U.S. tax liability.”

The truth? The IRS assumes full U.S. tax liability once you have an office or employees—making proper structuring critical.

Engaged in a U.S. Trade or Business (USTOB), Common Misconceptions.

Many foreign Amazon sellers believe they escape U.S. tax because they lack a U.S. office. In reality, storing inventory in Amazon’s U.S. fulfillment centers automatically creates a U.S. Trade or Business and Effectively Connected Income (ECI) under Reg. § 1.864-4(c).

Common misconceptions:
• “No U.S. office = no U.S. business.”
• “Amazon is just a logistics provider, so my sales aren’t U.S.-sourced.”
• “Using an LLC shields me from U.S. tax.”

The IRS applies the Asset-Use and Activities Tests to determine ECI, even in the absence of a physical office.

Selling on a Marketplace

Platform reality (tax first): Walmart allows a limited set of foreign countries to sell directly, but most nonresidents will still need a U.S. W-9, meaning a U.S. entity taxed as a partnership or corporation, which triggers Forms 1065 or 1120, possible state franchise or income exposure, and ECI/PE risk if you use WFS or U.S. agents.

TikTok Shop is effectively U.S. only: it requires a W-9, a U.S. Primary Business Representative with SSN and U.S. ID, and a verifiable U.S. address, so plan on a U.S. entity.

Amazon is the most flexible: you can operate with a W-8 (foreign company) or a W-9 (U.S. entity). On the foreign path, budget for an EIN, a possible protective Form 1120-F, and Form 8833 treaty disclosure, plus select state registrations even where the marketplace collects.

On the U.S. entity path, align the W-9, CP-575, and EIN, and file Form 5472 with a pro-forma 1120 for a foreign-owned disregarded LLC, or a full 1120 or 1065 as applicable.

If your foreign company and new U.S. entity will trade goods, services, IP, or loans with each other, transfer pricing rules apply. We set an arm ‘s-length price, sign an intercompany agreement, and document it up front to prevent double tax and IRS penalties.

Filing a Protective Return. Why CPAs Diverge.

  • Why the issue matters: If the IRS later decides your Amazon activity is ECI, you can lose deductions and face tax on gross sales unless you filed a protective return.

  • Common CPA splits:
    • “No U.S. tax due? Then skip the return.” True only when ECI is 100 % off the table.
    • “Protective filings are just for big corporations.” Wrong; single-member-LLC owners need them too.
    • “No U.S. office means I’m safe.” Ignores inventory in Amazon FCs, U.S. agents, or other PE triggers.

  • Protective return mechanics:
    • Foreign corporation: file Form 1120-F protectively + pro-forma 1120 with Form 5472.
    • Foreign individual (owns SMLLC): file Form 1040-NR protectively + pro-forma 1120/5472.

  • Treaty overlay: If you’re claiming “no Permanent Establishment,” attach Form 8833 or face a $1,000 (§ 6712) penalty, protective return or not.
  • Non-treaty sellers: Your only escape is proving no ECI at all (cross-border dropship, offshore POD, digital-only, etc.); the grey-area nature of that test is why many CPAs still recommend a protective filing.

  • Bottom line: When there’s any doubt, a protective 1040-NR or 1120-F (with 8833 where required) locks in deductions, starts the statute of limitations, and limits penalty exposure.

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Non-Resident Selling on Amazon Without a Tax Treaty

Selling on Amazon FBA as a non-resident without a U.S. tax treaty means there are no treaty benefits to reduce or eliminate federal income tax. Any profit that is Effectively Connected Income (ECI) is taxed at normal U.S. rates (after deductions) and must be reported on Form 1040-NR or 1120-F. Failing to file can let the IRS assess tax on gross sales and add penalties.

Common Misconceptions (No-Treaty Sellers)

  • “I don’t have a U.S. office, so I don’t owe U.S. taxes.” (Inventory in Amazon’s U.S. FCs already creates a U.S. Trade or Business.)
  • “Without a tax treaty, an LLC shields me from U.S. tax.” (The LLC is disregarded; the owner is taxed on the ECI.)
  • “If I leave the money in the LLC, I don’t have to report it.” (U.S. tax is based on where the profit is earned, not where it’s withdrawn.)

Key Compliance Questions

  • Are you engaged in a U.S. Trade or Business (USTB)?
  • Does that activity generate ECI? (Amazon FBA almost always does.)
  • Have you filed the proper returns? → 1040-NR/1120-F + pro-forma 1120/5472 for a foreign-owned SMLLC.

  • Have you considered state-income-tax or sales-tax nexus created by FBA inventory?

Bottom line: Without treaty protection, foreign Amazon FBA sellers should assume their profits are taxable in the U.S., file the required returns, and plan for state-level obligations to avoid costly re-assessments.

Does Selling on Amazon as a Foreign Entity Create a Permanent Establishment?

Expanding to Amazon FBA as a foreign corporation raises concerns about Permanent Establishment (PE)—a tax classification that can expose your business to U.S. corporate income tax and additional compliance requirements.

Common Misconceptions About Permanent Establishment:

  • “I don’t have a U.S. office, so PE rules don’t apply to me.”
  • “Amazon FBA doesn’t create a Permanent Establishment because it’s a third-party service.”
  • “If I don’t sign contracts in the U.S., I don’t have to worry about U.S. corporate tax.”

Key Factors That Can Trigger PE Status:

  • Fixed Place of Business: Inventory stored in Amazon-owned FCs is generally classified as “storage for delivery,” a preparatory/auxiliary activity under most treaties, so by itself it does not create a PE. A leased warehouse or office under the seller’s control would.
  • Dependent Agents: If a U.S.-based agent or representative regularly negotiates, signs contracts on behalf of your business, or with authority to conclude contracts, this could create PE under tax treaties.

Important Considerations:

  • A foreign corporation operating through Amazon FBA must test for PE under its treaty; no PE means you can claim zero U.S. tax on Form 8833.
  • A U.S. single-member LLC owned by a non-resident is a U.S. branch → by definition a PE. Treaty shelter disappears and U.S. tax applies to branch profits.
  • Bottom line: Know when inventory/location, agents, or a U.S. entity crosses the PE line—otherwise you could face unexpected corporate tax and penalties.

  • Fixed place of business (office, employees, factory)
  • Presence of dependent agents who have the authority to execute contracts (e.g., a sales agent who travels to the U.S. frequently to conclude contracts).
  • Providing services in the U.S. for more than a specified period (e.g., 183 days under many treaties)
  • Ownership of U.S. located assets, equipment, or real estate

Foreign sellers often assume that forming a U.S. entity reduces their tax obligations or eliminates the need for compliance. However, once a U.S. corporation is established, it is treated as a domestic taxpayer, meaning it is subject to U.S. federal income tax on its worldwide income regardless of the owner’s residency.

Common Misconceptions About U.S. Corporations:

  • “If I own a U.S. corporation, I can avoid personal U.S. tax liability.”
  • “Forming a corporation will automatically lower my U.S. tax burden.”
  • “Having a U.S. entity removes the need for tax filings in my home country.”

Key Tax Considerations:

  • A U.S. corporation is taxed at a flat rate of 21% on its worldwide income.
  • An LLC can elect to be taxed as a corporation by filing Form 8832 with the IRS, making it subject to the same corporate tax rules.
  • A U.S. corporation is a domestic entity for tax purposes, meaning it does not rely on tax treaties to determine its U.S. tax obligations.

Many foreign sellers misinterpret the tax obligations of a U.S. corporation, leading to compliance issues or unexpected tax liabilities in both the U.S. and their home country.

A U.S. LLC taxed as a partnership is a popular choice for foreign sellers because it creates a U.S. tax presence for platforms like Amazon (optional) and Walmart (required). However, foreign-owned partnerships have strict withholding and filing obligations that many sellers overlook.

Common Misconceptions About Foreign-Owned Partnerships

  • “A partnership doesn’t owe U.S. taxes since it’s a pass-through entity.”
  • “If I don’t take money out of the business, I don’t need to file a tax return.”
  • “Withholding tax only applies if the LLC has U.S. employees.”

Key U.S. Tax Considerations for Foreign-Owned Partnerships

  • The partnership itself does not pay U.S. taxes, but foreign partners are subject to withholding tax on their share of Effectively Connected Income (ECI) at a rate of 37% (or the highest individual tax rate).
  • Partnerships with foreign partners must withhold and pay estimated taxes throughout the year, even if no cash distributions are made.
  • The IRS requires Forms 8804 and 8805 to report withholding tax liability and partner allocations.
  • Foreign partners must file a U.S. tax return (Form 1040-NR or 1120-F) to claim deductions, credits, or treaty benefits.

Many sellers misunderstand the tax obligations of a partnership, leading to penalties for failing to withhold or file correctly.

Not sure if a partnership is the right structure for your business? Book a Free Discovery Call.

Determining whether a non-resident is engaged in a U.S. Trade or Business (USTOB) is not a simple yes-or-no question. The IRS does not rely on a single factor but considers the totality of a business’s activities in the U.S. Many sellers assume they are not engaged in a USTOB, only to face tax liabilities later.

Common Misconceptions About USTOB Classification

  • “If I don’t have a U.S. office, I don’t have a USTOB.”
  • “Amazon FBA is just a logistics provider, so my business isn’t U.S.-based.”
  • “If I ship to the U.S. but don’t live there, I don’t owe U.S. taxes.”

Key Factors That Determine USTOB Status

  • Substantial Activity – Does your business rely on U.S. operations beyond occasional sales?
  • Continuous and Regular Operations – Are sales, fulfillment, or services happening regularly in the U.S.?
  • Physical or Economic Presence – Do you store inventory, lease office space, or use U.S.-based services like Amazon FBA?

The IRS applies multiple tests, including the Asset-Use Test, which confirms that businesses storing inventory in the U.S. (such as Amazon FBA sellers) may qualify as engaged in a USTOB—even without a formal office or employees.

What Happens If You Are Classified as a USTOB?

  • Your U.S.-sourced income becomes Effectively Connected Income (ECI) and is subject to U.S. federal taxes.
  • You are required to file U.S. tax returns, such as Form 1040-NR (for individuals) or Form 1120-F (for foreign corporations).
  • Foreign corporations unsure about their USTOB status may consider filing a protective Form 1120-F to preserve the ability to claim deductions and limit IRS audit risks.

Many foreign sellers assume they are exempt from U.S. tax laws, only to discover later that their business operations trigger USTOB classification—leading to IRS penalties for non-compliance.

Uncertain about your U.S. tax status? Book a Discovery Call to see if you qualify for a paid consultation to assess your compliance risks.

Many tax preparers and business owners mistakenly assume that simply forming a U.S. LLC or opening a U.S. bank account automatically means a non-resident is engaged in a U.S. Trade or Business (USTOB).

Common Misconceptions About USTOB Classification

  • “If I form a U.S. LLC, I am automatically engaged in a U.S. trade or business.”
  • “Having a U.S. bank account means I owe U.S. taxes.”
  • “Amazon FBA alone always creates a USTOB.”

What Actually Determines USTOB?

  • The IRS looks at all business activities, not just entity formation or banking.
  • Physical presence, regular transactions, and substantial operations in the U.S. are key factors.
  • Selling through Amazon FBA does not always mean USTOB unless other business activities in the U.S. meet the threshold for regular and substantial engagement.

Misinterpreting USTOB rules can lead to unnecessary tax filings and payments when no U.S. tax obligation actually exists. On the other hand, some businesses wrongly assume they are exempt and later face IRS penalties.

Concerned about misclassification? Book a discovery call to determine if a paid consultation is the right next step for your business.

Sales Tax Compliance

Marketplace rules help, but they do not erase your obligations. Most states require marketplace facilitators to collect and remit sales tax on facilitated sales. That does not always remove the seller’s duties. If you place inventory in U.S. warehouses or meet a state’s economic nexus threshold, some states still require the seller to register, maintain an account, and in some cases file zero returns for marketplace sales. Plan for the basics: U.S. EIN, a verifiable U.S. address, state registrations, and periodic filings.

Foreign company path. If you sell as a foreign entity using a W-8, expect to obtain an EIN and complete state sales tax registrations where a physical or economic nexus exists. For federal income tax, many non-resident sellers also plan a protective Form 1120-F and a Form 8833 treaty disclosure when applicable. Sales tax and income tax are separate systems, so you can have sales tax registration requirements even while your federal income tax position is under a treaty.

Branch Profits

The branch profits tax (BPT) applies when a foreign corporation has a Permanent Establishment (PE) in the U.S. and repatriates income from a U.S. branch. The tax rate is 30%, unless reduced by a treaty.

Common Misconceptions About Branch Profits Tax

  • “Selling on Amazon means I owe branch profits tax.”
  • “If I have a U.S. entity, I must pay branch profits tax.”
  • “Branch profits tax and dividend withholding tax are the same thing.”

Key Considerations for Foreign Corporations

  • Most foreign e-commerce sellers do not owe branch profits tax unless they have a fixed place of business or dependent agents in the U.S.
  • Branch profits tax is different from dividend withholding tax. If a foreign corporation owns a U.S. subsidiary, dividends paid to the foreign parent are typically subject to withholding tax (often 30%, reduced by tax treaties).
  • Determining tax exposure requires analyzing entity structure, treaty benefits, and international tax rules.

Many foreign sellers misinterpret the tax treatment of hybrid entities and U.S. branches, leading to unnecessary filings, incorrect tax payments, or compliance issues.

Unsure how your structure impacts U.S. and foreign tax obligations? Schedule a Discovery Call to learn about our services and how we can assist with compliance.

What is the branch profits tax rate?

The Branch Profits Tax (BPT) is a 30% tax on the after-tax earnings of a foreign corporation’s U.S. trade or business, unless a tax treaty reduces or eliminates the rate. It applies when U.S. earnings are repatriated—or deemed repatriated—to the foreign parent company.

Common Misconceptions About Branch Profits Tax

  • “The branch profits tax applies to all foreign companies selling in the U.S.” → False – Most e-commerce sellers using a U.S. LLC do not trigger BPT unless they operate as a U.S. branch of a foreign corporation.
  • “If I don’t take money out of the U.S., I don’t owe branch profits tax.” → False – Even if funds are retained in the U.S., they may be deemed repatriated if not reinvested into U.S. operations.
  • “Branch profits tax and dividend withholding tax are the same.” → False – BPT applies to U.S. branch earnings of a foreign corporation, while dividend withholding tax applies to distributions from a U.S. corporation to foreign shareholders.

When Does the Branch Profits Tax Apply?

  • A foreign corporation must have a U.S. Trade or Business (USTOB) and a Permanent Establishment (PE) under a tax treaty.
  • BPT applies when a foreign corporation’s U.S. branch earnings are repatriated or deemed repatriated to the parent company.
  • Reinvesting profits into the U.S. operations may defer BPT, but proper structuring is required.

Key Takeaway: Avoid Misclassification & Unnecessary Tax Payments

Foreign corporations operating in the U.S. should carefully evaluate their tax structure to determine if BPT applies. Failure to plan properly can result in unnecessary tax payments or compliance risks.

Need expert guidance on your U.S. tax exposure? Book a Discovery Call to see if a paid consultation is the right next step for your business.

Reduction with a U.S. Tax Treaty

Many U.S. tax treaties include provisions that reduce the branch profits tax (BPT) rate, but the reduction varies by country and is not automatic. Some treaties lower the rate to as little as 5%, while others provide no reduction at all.

Common Misconceptions About Treaty Benefits for BPT

  • “All tax treaties reduce or eliminate branch profits tax.” → False – Some treaties do not provide any reduction.
  • “If my country has a tax treaty with the U.S., I automatically qualify for a lower BPT rate.” → False – Certain conditions must be met to claim treaty benefits.
  • “I don’t need to review the tax treaty because my CPA will handle it.” → False – Many advisors misinterpret treaty provisions, leading to misclassification or missed tax savings.

Key Considerations for Tax Treaty Reductions

  • Each country’s treaty is different—not all treaties reduce the 30% standard BPT rate.
  • To claim a lower rate, a foreign corporation must qualify under the treaty’s “Limitation on Benefits” (LOB) provisions.
  • Misinterpreting tax treaty rules can lead to unexpected tax liabilities or IRS challenges.

How to Determine If Your Business Qualifies for a Reduced BPT Rate

Understanding whether your business can claim a reduced branch profits tax rate requires a detailed analysis of the U.S. tax treaty with your home country.

Hiring a U.S Tax Attorney

Transfer Pricing for Cross-Border Sellers

Transfer Pricing: How Bigger Sellers Lose Money Quietly (and How to Fix It)
When a foreign company and a U.S. entity both touch the customer journey, who earns what matters more than your articles of organization?

  • Choose the right model: Buy-sell distributor, commissionaire, or services/marketing support. Each has different margin expectations and audit risk.

  • Document the split: Intercompany service agreements, royalty/license terms (if brand IP is foreign), and supporting benchmarks.

  • Price to the risk: Inventory, returns, and U.S. people typically deserve more profit than “light” support roles.

  • Protect the posture: Keep contemporaneous files (TP memo/benchmarks). If asserting no PE at the foreign level, ensure that U.S. activity is truly auxiliary; otherwise, move it and charge for it.

Who this is for: brands doing $1M–$20M+ who want to minimize global tax while passing U.S. scrutiny and platform checks.

Hiring a U.S Tax Attorney

State Income Taxes

State income taxes are more involved than sales tax because U.S. tax treaties do not cover state taxes.

Several factors come into play, and only a few states may require an additional filing beyond sales tax. For example, in Washington, a Business and Occupation tax (B & O tax) return must be filed with a tax rate of 0.471% (.00471) of your gross receipts. This is not collected and paid by the marketplace, i.e., Amazon.

Illinois has a retailer’s occupancy tax (ROT) for intrastate sales, which is not paid by the marketplace. This does not require an additional tax return but requires the marketplace seller to pay some taxes out of pocket. The ROT tax ranges from 2-4% on all intrastate sales into the state.

California and Texas have a required franchise tax fee, even if operating at a loss. Florida is a state where it is recommended for C corporations to foreign qualify to file a state corporate income tax return if they are collecting and remitting sales tax in the state.

If you have a sales tax nexus in most states, that does not automatically mean you also have an income tax nexus. A three-factor test is applied: sales income, assets owned, and payroll.

Filing Your U.S. Tax Returns

Sales Tax Compliance

We coordinate the plan; independent CPAs/attorneys sign opinions and file returns. Tell us your risk tolerance, volume, and tech stack. We’ll introduce 1–3 vetted options. You engage them directly.

Risk bands:

  • Conservative: treaty-friendly, protective filings, robust TP docs

  • Balanced: efficiency + defendable positions, tight documentation

  • Aggressive: documented, higher-yield positions where facts support (tax attorney that defends you in an IRS audit)

Note: Education & coordination only, not legal/CPA advice, and not a tax opinion.

Other income is subject to U.S. tax, EVEN if NOT connected to a trade or business

FDAP Income: FDAP income is subject to U.S. federal income tax even if it is not connected to a U.S. trade or business (USTOB). This includes passive income like interest, dividends, rents, royalties, and certain commissions. Typically, FDAP income is taxed at a flat 30% rate on a gross basis, unless reduced by a tax treaty between the U.S. and the foreign person’s home country.

Tax on Nonresident Aliens: Nonresident aliens (NRAs) are subject to U.S. tax only on their U.S.-source income. FDAP income, which is not connected to a USTOB, is taxed at the 30% withholding rate, and no deductions are allowed. For effectively connected income (ECI), which includes wages and income from a trade or business in the U.S., NRAs must file Form 1040NR and can claim deductions similar to U.S. residents.

Form 1040NR Filing Obligations: Nonresident aliens with ECI must submit Form 1040NR. However, if their only income is wages below the personal exemption threshold or if they only earn passive income on which the proper withholding was applied (reported on Form 1042-S), no U.S. tax return may be required unless they are claiming a tax treaty benefit to reduce withholding.

Tax Professionals Required

Partnering with the Right Tax Professionals for Your U.S. Expansion

Navigating U.S. tax regulations as a non-resident requires expert guidance to avoid costly mistakes, unnecessary filings, or IRS penalties. At NCP, we ensure that you have the right strategy in place before you form your U.S. entity.

As part of our client onboarding process, we provide essential training and connect you with trusted tax professionals specializing in U.S. taxation for foreign entrepreneurs. These professionals operate independently from NCP with separate fees, but we have vetted them to ensure they have the expertise to support your business right from the start.

The wrong tax structure can cost you thousands. Before you move forward, let’s make sure your foundation is solid. Book a Discovery Call to see if a strategy call or verified plan is your next step.

Tax Professionals Required

Learn more at our free U.S. tax master class at this link.

Legal Disclaimer: NCP does not provide tax, legal, or accounting advice. This website has been prepared for informational purposes and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.

[U.S. Tax Masterclass] USTOB & ECI and Your U.S Tax Requirements

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