U.S. Tax for Non-Resident E-Commerce Sellers—Are You Structured Correctly?
Most sellers assume they’re compliant—until the IRS says otherwise. Let’s ensure your business is set up the right way.
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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
Your U.S. tax responsibilities depend on how your business operates, including:
Whether you sell through a U.S. LLC or a foreign entity
✔ If you store inventory in the U.S. (e.g., Amazon FBA)
✔ Whether you have U.S.-based employees, contractors, or an office
Many foreign sellers misinterpret tax rules, leading to unexpected IRS penalties and compliance issues.
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 you use a Single-Member LLC (Disregarded Entity), Amazon will list the owner’s name—not the LLC—on your seller profile.
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.
✔ Stores inventory in the U.S. (e.g., Amazon FBA or third-party warehouse).
✔ Purchases products from U.S.-based suppliers or manufacturers.
✔ No U.S. employees or office, but fulfillment is managed inside the U.S.
Risk: Many sellers assume they can operate tax-free because they don’t have an office or employees. However, if your inventory is stored in the U.S., the IRS may classify your income as Effectively Connected Income (ECI)—making you subject to U.S. taxes.
Common Misconceptions:
“I don’t have a U.S. office, so I don’t owe U.S. taxes.”
“Amazon FBA is just a logistics provider, so my sales aren’t U.S.-sourced income.”
“If I sell through an LLC, I don’t have to pay U.S. taxes.”
The truth? U.S. tax law is complex, and misclassification can lead to IRS penalties.
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 sellers assume they are not engaged in a U.S. Trade or Business (USTOB), but the IRS considers more than just where you live. Here are some common misconceptions that can lead to unexpected tax liability:
- “I don’t have a U.S. office, so I’m not engaged in a U.S. business.”
- “Amazon FBA is just a logistics provider, so my sales aren’t U.S.-sourced income.”
- “If I operate through an LLC, I don’t owe U.S. taxes.”
The IRS applies multiple tests, including the Asset-Use Test, to determine whether your income is taxable—even if you don’t have a physical presence in the U.S.
Selling on Amazon FBA or Walmart
Expanding to Amazon FBA or Walmart as a non-U.S. seller comes with tax and compliance challenges that many overlook.
Walmart Requirements:
- Walmart requires sellers to file a W-9 as a U.S. taxpayer, meaning you must have a U.S. entity taxed as a corporation, partnership, or U.S. LLC.
- U.S. taxes will be due on U.S. profits, and tax treaties may determine whether you owe additional taxes in your home country.
- Walmart has strict e-commerce experience requirements before allowing new sellers on its platform.
Common Misconceptions:
- “I can sell on Walmart with just a foreign company.”
- “Walmart accepts W-8BEN like Amazon does.”
- “I won’t owe U.S. taxes if I don’t live in the U.S.”
Selling on Amazon and Walmart requires proper entity structuring to ensure compliance, avoid double taxation, and meet marketplace requirements.
Filing a Protective Return – What CPAs Disagree On
Foreign sellers often receive conflicting advice on whether they should file a protective U.S. tax return (Form 1120-F). Filing incorrectly—or not filing when required—could mean losing the right to claim deductions or being audited years later.
Common areas of disagreement among CPAs include:
- “If I don’t owe U.S. taxes, I don’t need to file anything.”
- “Protective returns are only for large corporations.”
- “Since I don’t have U.S. employees, I don’t need to worry.”
If there is uncertainty about your U.S. tax liability, filing a protective return may prevent long-term IRS exposure.
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 U.S. taxation. Your U.S.-sourced income may be fully taxable, and misclassification can lead to IRS penalties.
Common Misconceptions About U.S. Taxation Without a Treaty:
- “I don’t have a U.S. office, so I don’t owe U.S. taxes.”
- “Without a tax treaty, I can still avoid U.S. taxation with an LLC.”
- “If I don’t withdraw money from my U.S. business, I don’t have to report it.”
Key Considerations for Amazon FBA Sellers:
- Are you engaged in a U.S. Trade or Business (USTOB)?
- Is your income classified as Effectively Connected Income (ECI)?
- Have you structured your U.S. business properly to avoid overpaying taxes?
Without the protection of a tax treaty, foreign sellers must take extra steps to ensure compliance and avoid unnecessary tax burdens.
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: A U.S. office, warehouse, or physical presence may establish a taxable presence.
- Dependent Agents: If a U.S.-based agent or representative regularly negotiates or signs contracts on behalf of your business, this could create PE under tax treaties.
Important Considerations:
- A U.S. LLC owned by a non-resident is already a U.S. entity and is taxed as a U.S. business—PE rules do not apply.
- Foreign corporations must determine PE status under tax treaties to assess whether their U.S. income is subject to corporate tax.
Many foreign sellers misinterpret PE rules and unknowingly expose their businesses to unexpected U.S. tax liabilities and IRS audits.
- 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.
Hybrid Entities
Understanding Hybrid Entities and Their Tax Implications
A hybrid entity is treated differently for U.S. tax purposes than it is in the owner’s home country. This mismatch can lead to unexpected tax liabilities, denial of treaty benefits, or double taxation.
Common Misconceptions About Hybrid Entities
- “A U.S. LLC is always tax-efficient because it’s a pass-through entity.”
- “If the U.S. disregards my LLC for tax purposes, my home country will too.”
- “Hybrid structures automatically qualify for tax treaty benefits.”
Key Considerations for Hybrid Structures
- Some countries treat income from a U.S. LLC as corporate dividends, which can result in additional foreign taxes.
- Reverse hybrid entities (where the U.S. treats an entity as a corporation, but the home country sees it as a pass-through) may create treaty and reporting complexities.
- Anti-hybrid and transfer pricing rules are becoming more strictly enforced, impacting international tax planning.
Before structuring a U.S. entity, it’s critical to evaluate how income will be taxed in your home country to avoid unexpected liabilities.
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 to Support Your Position
If you’re from a country without a U.S. tax treaty, like Hong Kong, and you’re deemed engaged in a U.S. trade or business (USTOB), your company will be subject to U.S. taxes, similar to how a permanent establishment would be treated.
However, with the right legal defense, you might argue that your Amazon FBA activities don’t meet the threshold for USTOB if they aren’t considerable, continuous, or regular. A knowledgeable U.S. tax attorney can support this position and defend you if challenged by the IRS. While the legal fees may be significant, this investment could be worthwhile for companies with high profits and no tax treaty protection.
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.
Sales Tax Compliance
Navigate the U.S. Tax Complexities with Expert Guidance: Understanding your obligations is crucial in the ever-changing landscape of U.S. taxation for e-commerce. The sales tax terrain has been revolutionized since the landmark 2018 Supreme Court ruling in Wayfair vs. South Dakota. Now, 47 states have new economic nexus standards, freeing most marketplace sellers like you from having to register for sales tax. But nuances exist, and we’re here to decode them for you.
For example, Illinois’ audit division clarifies that just having your inventory in an Amazon FBA warehouse doesn’t warrant registration—Amazon’s got your tax obligations covered. Regarding corporate income tax, seeking a legally binding statement is advisable.
Shifting gears to non-marketplace sales? Platforms like Shopify bring different challenges. If you’ve been selling for years and are overdue on sales tax, we can conduct a nexus study to evaluate your liability and recommend the next steps—voluntary disclosure or strategic registration.
Why NCP? We collaborate with top sales tax software providers and specialized firms to offer you an unmatched blend of expertise and real-time insights. Navigating sales tax has never been easier if you’re eyeing the booming U.S. marketplace. Partner with NCP and make your U.S. e-commerce dream a streamlined reality.
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.
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.