QUESTION: As a Chinese entrepreneur who started selling on Amazon in 2016, I am seeking clarity regarding my U.S. tax obligations. In 2023, I received a notice from the California Department of Tax and Fee Administration (CDTFA) about sales tax liabilities in California. Consequently, I obtained an EIN through Nevada Corporate Planners, Inc. to meet California’s registration requirements. However, I missed the 2016 – 2022 tax return filing deadline with the IRS. I believe I qualify as neither a U.S. person for tax purposes nor as having a U.S. Permanent Establishment. Does this exempt me from paying taxes on my past sales in the U.S.? Additionally, I would appreciate guidance on resolving this issue and information about your service charges.
EXPERT’S RESPONSE: Completing your sales tax registration and acquiring an Employer Identification Number (EIN) are important steps in aligning with California’s state tax requirements. Your interactions with the California Department of Tax and Fee Administration (CDTFA) mainly pertain to state sales tax responsibilities and are separate from your federal tax duties. Nevertheless, it’s essential to assess if your Amazon FBA operations amount to participation in a U.S. trade or business (USTB), as this will determine if non-filing of federal returns from 2016 to 2022 could pose an issue.
Analysis of Your Tax Situation:
1. U.S. Federal Tax Obligations:
Whether you’re considered a “A NON-U.S. person for tax purposes” or have a “U.S. Permanent Establishment” depends on various factors like your residency status, business activities, and income sources.
- The determination of whether you have U.S. federal tax obligations depends on whether you are engaged in a U.S. trade or business (USTB).
- Generally, foreign entities are considered engaged in a USTB if they have employees, dependent agents, or exclusive independent agents in the U.S., or maintain a warehouse, office, or other places of business in the U.S.
- If you, or any agent on your behalf, have not physically worked in the U.S. and you do not maintain any physical presence like a warehouse, it’s less likely that your Amazon FBA activities constitute a USTB, and therefore no federal taxes may be due for those years referenced.
2. Permanent Establishment Considerations:
- The concept of PE becomes relevant if you are engaged in a USTB. In the existence of USTB, but Without a PE in the U.S., you might be exempt from U.S. federal taxes on business profits. However, this exemption typically applies to residents of countries that have a tax treaty with the U.S
- In summary, If you have USTB – but do not qualify as having a Permanent Establishment in the U.S., and your country has a tax treaty with the U.S., you might be exempt from U.S. income tax.
3. State Tax Obligations:
It’s crucial to understand that state tax obligations are separate from federal tax obligations and vary by state.
Your CDTFA notice regarding past California sales tax liabilities is independent of your federal tax filing obligations. You need to address them separately. Beyond federal considerations, each of the 50 states has distinct tax regulations. Your activities may require compliance with state-specific taxes, including sales tax registration, collection, and remittance, as well as possible state franchise and income tax obligations.
Each U.S. state has its own tax laws. The notice from CDTFA indicates a sales tax liability in California, suggesting a nexus with the state. This could arise from storing inventory in a California warehouse, or generating significant amount of sales in California to the extent that you exceed the economic threshold for that specific state.
Recommended Action Plan:
1. Review Your Activities:
- Examine your business activities to determine if they constitute a USTB. Focus on physical presence, employees, and the nature of your transactions in the U.S.
2. Tax Treaty Analysis:
- If you’re from a country with a U.S. tax treaty, review the treaty to understand the Permanent Establishment clause and its applicability to your situation.
3. State Tax Compliance:
- Address your sales tax obligations in California as indicated by the CDTFA notice.
- Assess if you have tax obligations in other states where you might have a business nexus.
O&G Tax and Accounting Services:
- At O&G, we specialize in tax matters for foreign-owned entities like yours. Our services include:
- Personalized tax advice considering your specific situation.
- Assistance with both federal and state tax compliance.
- Comprehensive accounting services including bookkeeping and software recommendations.
- Transparent and fixed pricing for clarity and budgeting.