U.S. Tax Responsibilities for Non-Resident E-Commerce Sellers
Clarify your U.S. tax obligations
U.S. Tax Levels
- There are two levels of tax: federal and state taxes. To better understand any applicable U.S. income tax laws, you must first understand the different U.S. tax system levels.
- You will want to understand how your U.S. earned income should be taxed. To do that, you will have to determine the degree of your company's involvement in the U.S.
Foreign Entity Selling into the U.S. or a U.S. LLC Owned by a Foreign Entity
Your U.S. tax responsibilities will come into play, whether you are a foreign company doing business in the U.S. or a single-member LLC in the U.S. owned by your foreign company. Keep in mind; Amazon will not allow you to change your legal business to a U.S. company unless you update the tax interview and legal entity properly and a single-member LLC disregarded will NOT show up as the business name on your seller profile page.
There are three levels to consider. This is a complex subject that requires consulting with a tax professional(s): Your company has no connections to any U.S. suppliers, with no U.S. employees, services , assets, or offices.
Your company uses U.S. suppliers or logistics (Fulfilled by Amazon- FBA) but has no U.S. employees. You MAY be deemed "engaged in a U.S. trade or business" and therefore have generated "effectively connected income." Most non-residents do NOT have U.S. employees or an office*, but they also mistakenly believe they are off the hook for U.S. taxes because they have no dependent agents. But there is more involved in the overall analysis is recommended. This area is where you will obtain different opinions based upon who is filing the U.S. returns and will represent you in case of an IRS audit three years down the road. *Amazon sellers who are also using Shopify and seeking to set up a legitimate U.S. bank account for Shopify Payments or Stripe may inadvertently create a U.S. office by meeting certain bank requirements, such as providing a physical business address, lease agreement, and utility bill. This could lead to the unintended consequence of establishing a U.S. trade or business (USTOB), which may trigger Effectively Connected Income (ECI) obligations and subject the seller to U.S. taxes. The need for a non-CMRA (Commercial Mail Receiving Agency) address emphasizes the requirement for a physical presence, which could inadvertently signal a more substantial business activity in the U.S. than anticipated.
If your company maintains an office or employs staff in the U.S. and regularly conducts business, these activities may cause the company to be considered as engaged in a U.S. trade or business (USTOB). As a result, any income generated from these activities could be classified as effectively connected income (ECI) and therefore subject to U.S. taxation.
Engaged in a U.S. Trade or Business
If your company sells on Amazon.com but ships products from outside the U.S. into the U.S., with no U.S. employees or office, this does not constitute being engaged in a U.S. trade or business (USTOB). However, even if you’re not engaged in USTOB, you may still need to file certain U.S. tax forms.
But this changed with the Tax Cuts and Jobs Act (TCJA) of 2017, before the title passage rule (where the sale of inventory was important, inside or outside the U.S.), but after 2017, now you need to look at the place of sale rule.
The TCJA clarified and expanded the rules for sourcing inventory sales.
The sourcing of income now depends on:
Where the goods are sold to customers, which is typically where the customer takes possession of the goods. For inventory produced in one location and sold in another, the income may be sourced proportionally between the place of production and the place of sale.
A U.S. single-member LLC (SMLLC) is treated as a disregarded entity for U.S. tax purposes. You must file Form 5472 and a pro forma Form 1120. While no federal taxes are typically due for a disregarded entity, state sales, and income tax rules could still apply based on your business activities.
Additionally, if you are considering changing the legal entity on your Amazon account, be cautious, as a single-member LLC may not be the best choice. Attempting to bypass the Amazon tax interview can risk your brand’s standing. Starting a new account under a new entity is different from changing an existing one, and forming an LLC taxed as a partnership or corporation will establish U.S. taxpayer status, altering your filing obligations.
Selling on Amazon.com FBA or Walmart
Walmart sellers must file a W-9 as a U.S. taxpayer, which means filing a U.S. LLC taxed as a corporation, partnership, or a U.S. corporation. In this situation with a U.S. taxpayer, U.S. taxes will be paid on U.S. profits, and depending on your treaty, benefits will determine the amount of tax paid in your country on the U.S. profits.
Walmart has several other requirements, including extensive e-commerce experience is required.
Filing a Protective Return
Most foreign sellers filing a U.S. federal protective return due to the tax treaties and lack of a permanent establishment may be paying federal income taxes on all profits back in their home country.
If you open a U.S. company, depending on how taxed you are, the factors above will determine whether any U.S. tax is due and which U.S. tax return is to be filed.
Non-Resident Selling on Amazon via FBA: U.S. Tax Considerations Without a Tax Treaty
If you are a non-resident selling on Amazon via FBA, either through a foreign entity or a U.S. single-member LLC (SMLLC) disregarded for tax purposes, and your country does not have a tax treaty with the U.S., you must evaluate several critical tax factors to determine your U.S. tax obligations.
- Evaluate Engaged in U.S. Trade or Business (USTOB): As a foreign entity or the owner of a disregarded U.S. SMLLC, the first step is to determine whether your activities constitute engaged in a U.S. trade or business (USTOB) and if that trade or business generates Effectively Connected Income (ECI), which would make your income subject to U.S. taxation.
- Permanent Establishment (PE) for Foreign Entities: If you’re operating as a foreign entity, assess whether your U.S. activities create a Permanent Establishment (PE) under U.S. tax law. PE is triggered when there is a fixed place of business (such as a U.S. warehouse or office) or a dependent agent who regularly concludes contracts on your behalf in the U.S. If a PE exists, the foreign entity becomes subject to U.S. tax on income that is attributable to the PE.
- Disregarded SMLLC and U.S. Taxation: For non-residents with a disregarded U.S. SMLLC, the LLC’s income flows directly to the owner. If your LLC’s activities in the U.S. are determined to constitute USTOB and generate ECI, you as the owner may be directly liable for U.S. taxes on the LLC’s income, even without a tax treaty in place.
- Impact of No U.S. Tax Treaty: The absence of a tax treaty between your home country and the U.S. means that there are no treaty benefits to reduce or eliminate U.S. tax liability. This could result in full U.S. tax exposure on your U.S.-sourced income, including possible withholding taxes and additional taxes like the branch profits tax for foreign corporations with a PE in the U.S.
- Foreign Tax Credits: While you may still be eligible to claim foreign tax credits in your home country for taxes paid in the U.S., the lack of a tax treaty increases the risk of double taxation. Typically, tax treaties include provisions that prevent or reduce the impact of double taxation, but in their absence, careful planning is required to mitigate tax burdens in both the U.S. and your home country.
In conclusion, if you are a non-resident selling through Amazon FBA and are from a country without a U.S. tax treaty, you must carefully evaluate whether your activities create U.S. tax obligations due to USTOB, ECI, or a PE. Failing to do so could result in significant tax liabilities without the benefit of treaty protections. We recommend you consult with two different U.S. tax attorneys who are on the same page about your situation and risks.
Go to this link to see the IRS list of countries with a tax treaty with the U.S.
Does Selling on Amazon as a Foreign Entity Create a Permanent Establishment?
For a foreign corporation selling on Amazon in the U.S., branch profits tax applies only if both a Permanent Establishment (PE) and U.S. sourced income are present. The branch profits tax, a specific U.S. tax on foreign corporations, is triggered when the foreign corporation has a PE and is subject to U.S. corporate income tax.
A PE is a taxable presence in the U.S., determined by having a fixed place of business or a dependent agent authorized to conclude contracts on the company’s behalf. However, if the foreign entity has no PE in the U.S., it is not subject to U.S. corporate tax or branch profits tax.
A branch, while similar to a PE, is not the same. A U.S. corporation is a separate legal entity and is not treated as a branch. Thus, a foreign entity with a U.S. corporation does not create a branch profits tax liability. Additionally, if the foreign corporation forms a U.S. LLC taxed as a corporation, it does not create branch profits tax either, since a U.S. corporation (or LLC taxed as one) is treated as a U.S. taxpayer, not a foreign branch.
In short, a foreign corporation needs both a PE and U.S.-sourced income to be subject to branch profits tax, and treaties may reduce the tax rate. Without both or if the entity is structured differently (e.g., as a U.S. corporation), branch profits tax does not apply.
The following items can create a Permanent Establishment (PE) for a foreign entity in the U.S., depending on the facts and circumstances
- 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).
- Ownership of U.S. located assets, equipment, or real estate
When a foreign seller establishes a U.S. entity required to pay taxes, that also creates a permanent establishment.
The most common U.S. entity is either a U.S. corporation or an LLC taxed as a corporation. An LLC taxed as a corporation requires Form 8832 to be filed separately with the IRS.
In both situations, the U.S. entity would file Form 1120 (and Form 5472) and pay taxes on profits at a flat 21%. In this situation, it is typical for a U.S. company to be owned by a foreign company.
Often, the foreign seller’s goal is to lower the U.S. profits and pay less tax while moving the profits to the foreign entity.
The challenge with these transactions is knowing the price transfer rules that measure them. Click here to learn more. These transactions must be at arm’s length, and they are often not.
An LLC taxed as a partnership is a flow-through and popular option to create a “U.S. person” for Amazon (optional) and required for Walmart. The withholding tax liability of the partnership for its tax year is reported on Form 8804. A Form 8805 for each foreign partner must be attached to Form 8804, whether or not any withholding tax was paid.
File Form 8804 by the 15th day of the 4th month after the close of the partnership’s tax year. However, a partnership made up of all nonresident alien partners has until the 15th day of the 6th month after the close of the partnership’s tax year to file. File Forms 8804 and 8805 separately from Form 1065. If a due date falls on a Saturday, Sunday, or legal holiday, file by the next business day.
If you need more time to file Form 8804, you may file Form 7004 to request an extension.
The tax is paid using another form. The partnership must use Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446), to make quarterly withholding tax payments to the IRS. A Form 8813 must accompany each tax payment made during the partnership’s tax year.
It is important to note that the partnership must pay the withholding tax regardless of the amount of the foreign partners’ ultimate U.S. tax liability (which is often dependent on other taxable income) and regardless of whether or not the partnership makes any cash distributions to the partners during its tax year.
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 and courts rely on a set of factors, looking at the overall facts and circumstances, including both the entity and the owner’s activities.
For an activity to qualify as USTOB, it must be substantial, continuous, and regular, with the primary goal of generating income or profit. Key considerations include where services are performed, where income is generated, and how the business operates in relation to U.S. customers or clients.
No single factor is determinative, and it’s important to assess all elements together, including the location of assets, the nature of business transactions, and the presence of any physical U.S. presence, like inventory storage or office space.
Many tax preparers mistakenly assume that forming a U.S. single-member LLC (SMLLC) or opening a U.S. bank account automatically means the non-resident owner is engaged in a U.S. trade or business (USTOB).
However, this is not always the case. The mere existence of a U.S. LLC or domestic accounts does not, by itself, establish USTOB. For instance, selling on platforms like Amazon with inventory stored in the U.S. does not necessarily create USTOB unless other factors, such as regular and substantial business operations in the U.S., are present.
A comprehensive analysis of all business activities, including where services are performed and the type of U.S. presence, is necessary before concluding U.S. tax obligations.
Misinterpretations often lead to unnecessary filings and tax payments when no USTOB or effectively connected income (ECI) exists.
Hybrid Entities
From a U.S. tax perspective, a hybrid entity is treated as fiscally transparent (such as a disregarded entity or partnership) for U.S. tax purposes but is treated as a corporation in another jurisdiction. For example, a U.S. LLC might be disregarded for U.S. tax purposes but treated as a corporation in a foreign country. In these cases, treaty benefits might not apply because the entity classifications between countries don’t align, and the foreign country may treat income differently than the U.S. does.
Foreign Dividend Treatment:
Some countries treat income from a U.S. LLC (even if disregarded in the U.S.) as dividends from a U.S. corporation. In contrast, others may offer favorable tax treatment for foreign dividends, making them non-taxable under certain conditions.
Reverse Hybrid Entities:
A reverse hybrid entity operates oppositely, being treated as a flow-through for tax purposes in a foreign country. Still, as a corporation in the U.S., this can result in unique tax challenges, as the entity is classified differently in each jurisdiction, impacting tax treaties and tax obligations.
Key Consideration:
Your home country’s accountant needs to evaluate how money received from a U.S. entity will be taxed in your home country. The interaction between U.S. and foreign tax laws, particularly with hybrid entities, can lead to complexities, including transfer pricing, treaty benefits, and dividend taxation issues.
For further compliance, always ensure that your international structure is reviewed thoroughly, particularly with respect to anti-hybrid regulations and transfer pricing rules, which are becoming more strictly enforced globally.
This analysis should give you a clear view of the complexities of hybrid and reverse hybrid entities and how foreign dividends may be treated differently depending on the jurisdiction.
Branch Profits
The branch profits tax (BPT) under Section 884(a) was introduced as part of the Tax Reform Act of 1986. It is designed to mirror the tax treatment of dividends paid by a U.S. subsidiary to its foreign parent. Instead of dividend distributions, the branch profits tax is imposed on the effectively connected income (ECI) of a U.S. branch of a foreign corporation when earnings are repatriated or deemed repatriated to the foreign parent company. The tax rate for branch profits is generally 30%, though it may be reduced or eliminated under certain tax treaties between the U.S. and the foreign corporation’s home country.
Key Clarification:
For the branch profits tax to apply, the foreign corporation must have a permanent establishment (PE) in the U.S., which is generally defined by tax treaties. A PE usually requires a fixed place of business in the U.S., such as renting an office or hiring dependent agents who can conclude contracts or perform key business functions on behalf of the foreign corporation. Dependent agents are individuals or entities controlled by the foreign corporation, such as a salesperson or representative, whose actions bind the foreign company.
Most foreign e-commerce sellers, such as those selling on Amazon or Walmart, typically do not have a PE in the U.S. because they lack a fixed place of business or dependent agents operating in the U.S., meaning that the branch profits tax generally wouldn’t apply to them.
Distinguishing Branch Profits Tax from Dividend Withholding Tax:
If a foreign corporation owns a U.S. subsidiary, such as a U.S. corporation, this does not trigger the branch profits tax. Instead, the foreign corporation would face dividend withholding taxes, typically 30% (often reduced by tax treaties), when profits are distributed from the U.S. corporation to the foreign parent. This dividend withholding tax only applies when profits are distributed as dividends, unlike the branch profits tax, which applies to ECI when it is repatriated or deemed repatriated from a U.S. branch.
What is the branch profits tax rate?
The branch profits tax rate is typically 30% unless reduced or exempted by an applicable tax treaty. This tax is imposed on the after-tax effectively connected earnings and profits (E&P) of a foreign corporation’s U.S. trade or business. The branch profits tax applies when these earnings are deemed to be distributed by the U.S. branch to the foreign parent company, mimicking the tax treatment of dividends distributed by a U.S. subsidiary to its foreign parent.
Reduction with a U.S. Tax Treaty
Many tax treaties between the U.S. and other countries include provisions that reduce the branch profits tax rate, which can vary from one treaty to another. In some treaties, the rate may be reduced to 5%, but this is not universal. The applicable rate depends on the specific tax treaty provisions for each country.
Therefore, it is important to consult the specific tax treaty between the U.S. and the foreign country to determine the exact branch profits tax rate reduction. The IRS tax treaty table can be a helpful resource for identifying potential tax treaty benefits for branch profits tax reductions.
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
At NCP, we provide essential training and guidance before you form your U.S. entity. As part of our new client onboarding, we will introduce you to experienced tax professionals who can assist with your tax needs. Please note that their services are independent of NCP, and their fees are separate. We are confident they have the expertise to support you in navigating U.S. tax regulations effectively.
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.