Amazon Foreign Sellers, US Taxation and 1099-K Reporting
Are foreign sellers selling in the US on amazon.com required to pay US Federal taxes?
Foreign Sellers doing business with amazon using the FBA , FBM or the Drop shipping method has had to deal with this question for so many years. I have reviewed several tax returns where some CPA’s, Attorneys, and other tax professionals take the most conservative approach by filing tax returns and declaring profits for such foreign sellers.
Foreign Sellers are being taxed in the US in cases where they are NOT supposed to be taxed in the USA, this could have been avoided if the tax return was prepared correctly.
What Elements Do I need to prove to be Exempted from US Taxes on my Amazon Sales?
The truth of the matter is, if you’re a foreign person from a country that has a Tax Treaty with the U.S, and you sell on the amazon platform regardless of FBA, FBM or Dropshiping , and you’re NOT regarded as:
(A) U.S Person for Tax Purposes, and
(B) Having US Permanent Establishment in the USA ,
Then the U.S may not tax income you make on Amazon through sale of goods or services.
(A) U.S Person for Tax Purposes
– All US citizens. An individual is a citizen if that person was born in the United States or if the individual has been naturalized as a US citizen.
– You can also be a US citizen, even if born outside the United States if one or both of your parents are US citizens.
– You are a ‘tax resident’ of the United States. You can become a tax resident under two rules:
1) The ‘substantial presence test’. This is a ‘day count test and based on the number of days you are in the US over a three-year period and
2) The ‘green card’ test. A person who has obtained a ‘green card’ has been granted the right to lawful permanent residence in the United States.
(B) Having US Permanent Establishment in the USA
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
A.the use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the foreign Person or Entity
B.The maintenance of a stock of goods or merchandise belonging to the Person or Entity solely for the purpose of storage, display, or delivery
C.The maintenance of a stock of goods or merchandise belonging to the Person or Entity solely for the purpose of processing by another person
D.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
E.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
F.The maintenance of a fixed place of business solely for any combination of the activities mentioned in subparagraph a) through a)
Is Amazon Considered a dependent Agent for the purpose of Permanent Establishment?
If your sole activity is to cause products or services to be delivered from overseas to Amazon warehouse or platform in the USA, then the income generated from such activity as a foreign person or entity without Permanent Establishment should not be taxable in the US.
It is an established truth that Amazon is not a dependent agent of their sellers, a foreign seller who sells product into the US market either in their own capacity, or through a US Single Member LLC may be able to override the tax imposed on such income, especially if they’re residents in one of the treaty countries mentioned earlier.
Foreign Persons usually orders and ships products to Amazon warehouse where amazon employees offer such products for sales on amazon website for each product, package the product, and ship to customers within the US and other countries.
Amazon in this case is not an employee or dependent agent of the foreign seller, but rather an independent agent that deals with Millions of Sellers including Domestic and Foreign Sellers.
Amazon is not uniquely working for you as a foreign seller. However, income from inventory sales to U.S customers where title passes in the U.S is considered to be effectively connected income which makes your income taxable in the US.
Invoking the treaty ensures that none of those income get taxed.
What if I receive a 1099-K from Amazon, Do I need to report that ?
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 who have 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.
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 tax 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 reported on the 1099-K.
Depending on your situation, the tax preparer may suggest the following as the best course of action
•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.
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
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!
Infact, the IRS requires every US LLC owned by a Single Member who is a foreign person to file an informational return in the form of a Pro-forma 1120 and 5472.
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
See more extensive coverage on Amazon Sellers 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**