10 Answers to Your Questions About U.S. Taxes for Foreign Sellers on Amazon
Because of vague or complicated international tax issues, foreign sellers doing business with Amazon using the FBA, FBM, or dropshipping method have had to deal with tax questions for years. Sometimes it seems hard to get a clear answer. Even tax professionals sometimes give faulty advice that has their clients forking over money to Uncle Sam that they don’t have to.
I’m here to set the record straight. Here are answers to the 10 most important questions about taxes for Amazon foreign sellers.
1. Are foreign sellers selling on Amazon.com in the U.S. required to pay U.S. federal taxes?
That depends on a few factors—which we’ll get into. But the short answer is not always, as long as you know what you’re doing.
I’ve reviewed several tax returns where CPAs, attorneys, and other tax professionals take the most conservative approach by filing tax returns and declaring profits for foreign sellers. In many cases, those foreign sellers are paying taxes when they are not required to. They’re losing money unnecessarily.
This could have been avoided if their tax returns had been prepared correctly.
2. Am I exempted from federal taxes on my Amazon sales in the U.S.?
- Come from a country that has a tax treaty with the U.S
- Are not a “U.S Person” for tax purposes
- Do not have a permanent establishment in the U.S.
…then the income you make on Amazon through the sale of goods or services in the U.S may not be taxable.
3. What is a “U.S. Person” for tax purposes?
First off, all U.S. citizens are. But so are “tax residents.” You can also become a U.S Person for tax purposes based on the following:
- The “substantial presence test.” This is based on the number of days you are in the US over a three-year period.
- The “green card test.” A person who obtains a green card has been granted the right to lawful permanent residence in the United States.
- Anyone that has made a special election to be treated as a U.S Resident for tax purposes
If you are neither a U.S. citizen nor U.S Person for tax purposes, you are a foreign person or a Non-Resident Alien.
4. What is a “permanent establishment” in the U.S.?
A Foreign Person or Foreign Entity operating in the USA through a fixed place has a “permanent establishment.” A fixed place of business can include the following types of physical locations in the USA:
- Place of management
- Branch or an office
- Use of employees or dependent agents
- Independent agents who’s services are devoted entirely or almost entirely to your business
- A mine, oil, or gas well, quarry, or any other place where natural resources are extracted
If you have any of these in the U.S., you have a permanent establishment.
5. Are there any exceptions to the permanent establishment rule?
Yes. The whole concept of permanent establishment can be very confusing for foreign marketplace sellers and service providers. United States has agreed to tax treaties with foreign countries which creates certain exceptions.
The following activities in the U.S. do not create a permanent establishment:
- The use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the Foreign Person or Foreign Entity
- The maintenance of a stock of goods or merchandise belonging to the Person or Entity solely for the purpose of storage, display, or delivery
- The maintenance of a stock of goods or merchandise belonging to the Person or Entity solely for the purpose of processing by another person
- The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the Person or Entity
- The maintenance of a fixed place of business solely for the purpose of carrying on, for the Person or Entity, any other activity of a preparatory or auxiliary character
- The maintenance of a fixed place of business solely for any combination of the activities mentioned
6. Is Amazon considered an independent agent for the purpose of permanent establishment?
I mentioned that one of the examples of a permanent establishment would be independent agents who’s services are devoted entirely or almost entirely to your business.”
So would Amazon count? No. Amazon is not uniquely working for you as a foreign seller. Amazon is therefore an independent agent that deals with millions of Sellers including Domestic and Foreign Sellers
Income from inventory sales where product are shipped to amazon warehouse or fulfillment centers and eventually sold to U.S customers, and where title passes in the U.S. is considered to be effectively connected income which makes your income taxable by the IRS.
Invoking the treaty ensures that none of that income gets taxed.
A Non-resident Alien who is a resident of a jurisdiction having an income tax treaty with the United States are afforded the opportunity to use the Business Profits Article (Article 7 of the U.S. Model Treaty) or Non-Discrimination Article (Article 24 of the U.S. Model Treaty) of the treaty to override domestic tax provisions.
7. What if I receive a 1099-K from Amazon—do I need to report that?
Yes, and I will explain the details below. But first, here’s why you probably won’t get a 1099-K in the first place.
Generally, Amazon will allow foreign sellers to complete W8-BEN or W8-BEN-E which gives Amazon an indication that you’re a foreign seller who has beneficial ownership to the income received from your sales on Amazon. Foreign sellers who successfully complete the W8 form series will not receive 1099-K at year-end. This means that your income was determined to be exempt from U.S. tax reporting as captured from the Amazon FAQS here
1099-K should also only be provided to individuals or entities who have certified that they’re US persons or entities for income tax purposes. Depending on how you answer your tax on-boarding questionnaire on Amazon, you could be routed to complete either a W8 form for Foreign Persons or a W9 form for U.S. Persons.
But whenever Amazon does issue a 1099-K against your ITIN/EIN or SSN , they send a copy to the IRS. The IRS will then use the 1099-K information to reconcile against your tax return. This process sometimes creates a huge tax liability for the foreign seller, because the only information the IRS has on you is the total sales you made with no corresponding tax return, deductions or credits to offset the amount of tax liability the IRS is computing.
To avoid receiving nasty letters and notices from the IRS, it is advisable that you file a tax return based on the amount reported on the 1099-K. (If you receive one at all.) However, you are not required to pay anything, only to report the income.
Because the income reported on the 1099-K will not be taxable to most foreign sellers, it is important that you contact a competent tax professional who will ensure that the form is accurately reported and that you should indeed file. The tax professional can also make sure you don’t pay a dime on the income reported on your 1099-K.
Depending on your situation, the tax preparer may suggest the following as the best course of action:
- Not filing
- Filing a Protective Return
- Claiming a Treaty
8. After reading this article, I realized that I have been filing my taxes wrong. What should I do?
I’m always here to help. I’ve assisted many foreign and domestic Amazon sellers who handled their taxes incorrectly or paid the IRS when they didn’t have to. If you fall into this category, contact me and I’ll work with you to retrieve your taxes in the form of a refund.
You don’t have to just kiss that money goodbye.
9. Can you help with my Amazon bookkeeping, sales tax registration, or tax returns?
NOTE: It doesn’t have to be just Amazon, either. I can help foreign sellers doing business on other major e-commerce platforms such as Jet, Walmart, eBay, Shopify, Etsy, etc.
However, if you’re a foreign person with ownership in a U.S Partnership or Corporation or comes from a country that does NOT have a tax treaty with the US , this article DOES NOT apply to you. Please contact me for more information.
10. What forms would I need to file If I’m running my business using a U.S. single-member LLC?
So you’re a foreign person with a U.S. disregarded entity that doesn’t have any U.S. income tax obligation due to the various factors mentioned above. Does that mean you get to close the book and go home early? Not necessarily.
Failure to file these forms comes with a $25,000 penalty, the purpose of these forms is informational purposes only and does not carry any tax obligation. I have covered this topic extensively in the links below.
***Disclaimer: I am a tax accountant and a CPA , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**