Amazon Foreign Sellers, U.S Taxation and 1099-K Reporting
Foreign sellers who sell to U.S. customers on Amazon are often faced with the question of whether they have to pay taxes. When in doubt, they often take the safe route and report their profits. In fact, I’ve reviewed several tax returns where a CPA, attorney, or other tax professional advised their foreign clients selling on Amazon to file for U.S. federal tax returns.
However, in many cases, these foreign sellers were never required to file and are paying taxes without need. To help you avoid making the same mistake, here are the answers to the most important questions about Amazon foreign sellers and U.S. taxation.
Are Foreign Sellers Selling Amazon.com Required to Pay U.S. Taxes?
Under Section 882, a foreign corporation that is “engaged in trade or business within the United States” is subject to U.S. federal income tax on its income that is “effectively connected with the conduct of a trade or business within the United States.
IRC §871(b) also explains that a nonresident alien (NRA) individual is generally subject to U.S. income taxes at graduated rates on taxable income which is effectively connected (ECI) with the conduct of a U.S. trade or business (USTB).
Think of USTB as a “shield” to avoid US taxation. This is your first line of defense or the necessary condition that needs to occur before taxation results. For a foreign corporation or person to have effectively connected income, it must FIRST be engaged in a trade or business within the United States.
In other words, if the activities of the foreign corporation or person does not rise to the level of trade or business “within the United States,” the income (only active income , not FDAP) of the foreign taxpayer will not be subject to U.S. federal income tax.
The regulation does not define USTB, and there is no straightforward answer to what constitute USTB. The IRS generally, will not rule on whether a foreign person is engaged in USTB or whether that USTB receives effectively connected Income – Rev. Proc. 2003-7 .
However, A careful analysis of prior case laws, as well as various IRS interpretation , chief counsel memos , revenue rulings and the examples found in IRC 1.864-4 points to the fact that a foreign person not physically present in the United States who merely solicits orders from within the United States ONLY through advertising and then sends inventory to the United States in satisfaction of the orders is not likely to be engaged in a trade or business in the United States.
As a foreign seller on Amazon, that’s good news for you!
That said, even when you are not directly engaged in a U.S. trade or business, you could be deemed to be engaged in a U.S. trade or business as the result of regularly selling into the United States through a US office, an employee, dependent agents or “exclusive independent agent”.
And in some cases where the foreign person or corporation does not have a U.S office or location, they could be considered to be engaged in a USTB if any of their employees or corporation agents are physically present in the U.S. for purposes of advertising their products, demonstrating their products or soliciting orders.
But if all you do is advertise your products online and deliver them overseas to one of Amazon’s warehouses in the U.S. through Amazon’s fulfillment service, you would not be engaged in a USTB, and thus not subject to taxation for products sold in the U.S..
Products are ordered and shipped to Amazon’s warehouses, where Amazon employees offer such products for sale on amazon’s website for each product, package the products, and ship to customers within the US. In this case, Amazon is not a dependent agent but non-exclusive independent agent that has its own business with millions of other clients.
Amazon is not uniquely working for any of its foreign sellers. Therefore, the foreign seller is not “engaged in a trade or business in the US,” and not subject to US tax on income from selling products into the US.
What Is “Effectively Connected Income” (ECI)?
If a foreign person or corporation is found to be engaged in trade or business within the United States, the next step is to determine the character and the source of each item of the foreign persons income and whether each such item is effectively connected with the conduct of such trade or business pursuant to section 864(c) – see InverWorld, Inc. et al. v. Commissioner.
Think of ECI as the “sword” , this is when the IRS attacks . Once you pass the USTB test , the limited force of attraction rule 864(c)(3) sets in to render the income and gain on sales of inventory and other property held for sale to customers in the ordinary course of business, and for which the income are sourced in U.S. as ECI.
Once USTB is found to exist, it subjects virtually all of the income you make from selling in the U.S. to taxation, whether or not the income was actually generated by the operations of the USTB.
Can a treaty override ECI?
Yes! even when ECI is found to exist , Some U.S. tax treaties may override ECI provision ( see section 894, see also section 7852(d)). Non-resident aliens and foreign corporations who are entitled to benefits under a U.S. income tax treaty are only subject to U.S. tax if the ECI is attributable to a permanent establishment located in the United States.
What is Permanent Establishment?
A Foreign Person or Entity must operate in the USA through a fixed place of business to create a Permanent Establishment. A fixed place of business has been defined to 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 are devoted wholly or almost wholly on behalf of your business
- A mine, oil, or gas well, quarry, or any other place where natural resources are extracted
Are There Any Exceptions to the Permanent Establishment?
Yes , The whole concept of permanent establishment can be very confusing for Amazon sellers or service providers like yourself , therefore various Tax Treaties between the United States, and other foreign countries created some exception in instances where your activities in the US will not be considered as creating a permanent establishment.
The following activities in the USA does not create 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 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 in subparagraph A) through E)
If I Receive a 1099-K from Amazon, Do I Need to Report That to the IRS?
Yes, and I will explain the details below
Generally, Amazon will allow foreign sellers to complete W8-BEN or W8-BEN-E which gives amazon indication that you’re a foreign seller with 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 US Tax reporting – see here.
Also 1099-K should only be provided to individuals or entities who have certified that they’re US persons for income tax purposes. Depending on how you answer your tax on-boarding questionnaire on Amazon, you could be routed to complete either W8 form = Foreign Persons, or W9 form = US Persons.
Back to reporting on the 1099-K…
Whenever Amazon issues a 1099-K against your ITIN/EIN or SSN , they send a copy to the IRS . 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 simply because the only information the IRS have on you is the total sales you made , but there is no corresponding deduction, and a return to offset the amount of tax liability the IRS is computing.
To avoid receiving nasty letters and notices from IRS, it is advisable that you file a tax return based on the amount reported on the 1099-K.
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 at the same time making sure that you don’t pay a dime on the income (provided its not considered as USTB, or if treaty overrides ECI) reported on the 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, or
- Claiming a Treaty.
After reading this Article, I realized that I have been filing my taxes wrongly, what should I do?
We are always here to help; we have assisted many Foreign and Domestic amazon sellers retrieve taxes incorrectly or mistakenly paid to the IRS. If you fall in this category, contact us and we will work with you to retrieve your taxes in the form of a refund.
Can you Help with my Amazon Bookkeeping, Sales Tax Registration and Tax Returns?
Absolutely! We are always happy when new clients come on board, just click this link to begin.
NOTE: This Articles also applies to Foreign Sellers doing business on other major e-commerce platforms such as Jet, Walmart, Ebay, Shopify, etsy, Paypal etc.
CAUTION:If you’re a foreign person with ownership in a U.S Partnership or Corporation , this Article or scenarios described above DOES NOT apply to you. Please contact us for more information if you have ownership in a US Partnership or Corporation
Another issue worth mentioning is State Taxes and compliance , this article does not seek to capture State taxes , there are 50 states in the Union, and you may have a state tax filing obligation such as Sales tax registration, collection and remittance.
You may also have State Franchise and State Income Tax requirements depending on your level of business activities within a specific state. Always consult a competent tax advisor as to what your state and federal tax obligations are.
What other Forms Do I need to File If I am running my business using a US Single Member LLC ?
The fact that a foreign person with a US disregarded entity does not have US income Tax obligation due to the various factors mentioned above , does not mean every foreign person with a US single member LLC gets to close the book and go home early!
Failure to file these forms comes with a $25,000 Penalty, this form is informational purposes only and does not carry any tax obligation. I have covered this topic extensively in the links below.
- California FTB Demand for Tax Return notices to Out-Of-State sellers
- How to File Forms 5472 and 1120 for a Foreign-Owned Single Member LLC
- USA – INDIA F-1 & J-1 Tax Treaty (Students & Business Apprentice)
- What Forms Do Foreign-Owned Single Member LLCs Have to File?
- 7 Common Questions about Foreign-Owned U.S. LLCs Answered—by a CPA
- The 12 Most Important Questions about U.S. LLCs Answered—by a CPA
- Claim Tax Treaty, Avoid Double Taxation and Request VAT Exemption – The Magic of Form 6166 & 8802
- Samples of U.S. Residency Certifications – Form 6166
- 15 Common Questions About Expatriation, Form 8854, and the Exit Tax—Answered by a CPA
- Forms and Filing for Foreign-Owned LLC Multi-Member Partnerships | Exploring a Case from an Australian-Owned U.S. Partnership
- Which Tax Forms Do Foreign-Owned U.S. Multi-Member LLCs Have to File?
***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , 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**