Selling on Amazon or Shopify to U.S. Customers From Abroad: U.S. Tax Obligations

Federal income tax: is there a U.S. trade or business?

A foreign seller is taxed in the United States on business income only if it is effectively connected with a U.S. trade or business. Occasional sales to U.S. customers shipped from abroad generally do not create one. Regular and continuous activity in the United States can — for example, employees or dependent agents in the United States, a U.S. office, or ongoing management of U.S. operations. The use of U.S. fulfillment warehouses, such as Amazon FBA, is a frequent source of uncertainty because inventory is stored and shipped from within the United States on a continuous basis. There is no single IRS ruling that resolves this for all sellers, and the conclusion should be reached on the specific facts.

Where the income comes from

Even if there is a U.S. trade or business, the Code's source rules determine how much of the income is U.S.-source. Income from selling inventory purchased for resale is generally sourced where the sale occurs — typically where title passes — while income from selling inventory the seller produced is sourced based on where the production assets are located. A special rule can treat income from sales attributable to a U.S. office or fixed place of business of a nonresident as U.S.-source. These rules can produce very different results for a reseller and a manufacturer with the same revenue.

The treaty question

Sellers resident in a country with a U.S. income tax treaty are generally taxable on business profits only if they have a permanent establishment in the United States. Most treaties exclude facilities used solely for storage, display or delivery of the enterprise's goods from the definition of a permanent establishment, which can matter for warehouse arrangements. Sellers resident in countries without a treaty — including most of Latin America other than Mexico, Venezuela and Chile — do not have that protection.

Sales tax is separate

Sales tax is imposed by states, not by the federal government. After the Supreme Court's 2018 decision in South Dakota v. Wayfair, states may require remote sellers to collect sales tax once they exceed economic thresholds in the state. Every state with a sales tax has also adopted marketplace facilitator rules under which platforms such as Amazon collect and remit sales tax on marketplace sales. Sellers who also sell through their own website, or who store inventory in a state, may have their own registration and filing obligations. Income tax and sales tax conclusions do not depend on each other.

Filings when a U.S. LLC is used

• Form 5472 with a pro-forma Form 1120 each year for a foreign-owned single-member LLC
• Form 1040-NR for the owner if the business has effectively connected income
• Form 1065 for a multi-member LLC, with section 1446 withholding where foreign partners have effectively connected income
• State registrations, annual reports and any sales tax returns
• Accurate Forms W-8BEN or W-8BEN-E provided to the marketplace and payment processor

Platform tax interviews and Forms 1099-K

Marketplaces ask sellers to complete a tax interview, which produces a Form W-8 or W-9. A foreign-owned disregarded LLC is generally not a U.S. person for this purpose; the foreign owner typically provides a Form W-8BEN or W-8BEN-E. Completing a W-9 in the LLC's name can cause the platform to issue Forms 1099-K and to treat the seller as a U.S. taxpayer, which may be inconsistent with the owner's actual position.

The home country

The seller's home country will usually tax the business income, and it may apply controlled foreign company, transparency or value-added tax rules. Customs duties and import rules for goods sent into the United States are a separate area again. A sound structure considers all of these together rather than treating the U.S. LLC in isolation.

Sources and official references

• IRS — Effectively Connected Income (ECI)
• IRS — Publication 519, U.S. Tax Guide for Aliens
• IRS — Instructions for Form 5472
• Supreme Court — South Dakota v. Wayfair (2018)