One of the most common questions we get at Bobsled Marketing from companies located outside the US is around the tax implications of selling their products on Amazon. Companies which are established outside the US need to know whether they are required to pay US federal income tax, state income taxes, and state sales taxes. And a lot of the information out there is conflicting or confusing.
We’re definitely not tax experts here at Bobsled Marketing, which is why I got in touch with US Tax Attorney, Stewart Patton, from ustax.bz to shed some light on the matter. In this video interview with Stewart, we dive into the following questions:
1. For brands which are already established in non-US markets, what kind of US entity, if any, should they set up when planning to launch & sell products in the US on Amazon.com?
2. Are non-US entities / individuals selling on Amazon ONLY, subject to US income taxes? How about state sales taxes?
3. Does that change if the brand also establishes their own ecommerce store?
4. How do you see the US tax system changing in the future as it pertains to non-US brands engaging in e-commerce?
Stewart is a US tax attorney and expat entrepreneur based in beautiful Belize. While a lot of his work is with US nationals who are living outside the US, he does also have a lot of experience with non-US individuals and corporations who are looking to establish a business in the US.
Here’s a summary of key points from the video, and links to these sections in the video.
03:05 - Should non-US companies set up a US legal entity (corporation, LLC, etc) to start selling on Amazon?
There is no US tax reason or benefit to set up a US entity if you’re a non-US company looking to sell on Amazon. In fact, if the entity is set up incorrectly, there could be adverse consequences. Stewart sees other non tax-related reasons for setting up an entity in the US, such as to facilitate opening a US bank account and simplifying currency exchange and other monetary payments.
06:12 - What types of taxes are companies selling on Amazon required to pay?
There are 3 main levels of taxes at the business level in the US: Federal income tax, State income tax, and State sales tax. Note that some States also tax at the County and even City level.
08:36 - The 3 branches of the US legal system and how they inform tax law & Stewart’s interpretation of whether companies should be paying US federal income, state income, and state sales taxes.
Federal income tax: Stewart believes that if you’re a non-US entity and only selling on Amazon, you are not required to pay US federal income taxes. Remember that this is an opinion based on a set of facts and legal precedents. Background on this interpretation comes down to how the US legal system is structured.
a. Legislative branch: comes up with statutory law, including the Internal Revenue Code. The Internal Revenue Code says if you’re a non-US person and you’re “Engaged in a Trade or Business” in the US you are subject to pay income tax.
b. Executive branch - enforces the law & comes up with regulations which refine the statutory law (treasury regulation). What does the IRS say in the Treasury regulations (which interpret the Internal Revenue code)? This provides a few more examples of what “Engaged in a Trade or Business” means.
c. Judicial branch - comes into play when there is a disagreement between the IRS and an entity or individual. The judicial branch will help to decide the outcome of the dispute.
09:40 - How the interpretation of “Engaged in a Trade or Business” affects brands selling on Amazon.
The challenge is clearly around what “Engaged in a Trade or Business” actually means. This is what makes the issue so complex, because it’s open to interpretation and see how it’s been applied to cases in the past.
Tax professionals often specialize in particular areas, so it’s important to work with a professional who understands the nuances of your particular situation.
15:19 - Treatment of State Income Taxes for non-US companies selling in the US on Amazon.com
Stewart believes that State Income Tax is likewise not applicable to non-US persons or entities selling via Amazon.com. He explains that the US constitution imposes limits on each State’s ability to impose taxes. Also, if a business or entity has no taxable income for federal tax purposes, there would be no State Tax payable, as State income taxes are apportioned based on federal income tax.
17:28 - Treatment of State Sales taxes for non-US companies selling in the US on Amazon.com
State Sales Taxes are based on a “nexus” concept. Some States will consider holding inventory in their State as creating a Nexus - therefore all Amazon FBA sellers will have tax nexus in multiple States.
We do recommend that brands use software tools for tracking and remitting State Sales taxes. One that our clients use at Bobsled Marketing is Taxify. Taxify is a fully automated sales tax return and remittance process, for all states and locales across the US, and it integrates easily with Amazon as well as other ecommerce platforms.
20:57 - VAT versus US State sales tax - a fair comparison?
Both State sales taxes and VAT are consumption taxes. But they do differ in a few key ways.
1. There is more certainty around whether you do or don’t have to register to pay VAT, and in what jurisdictions.
2. Sales tax in the US is not “Paid”, it is just collected and remitted back to the applicable State.
3. VAT is included in the sales price, State sales tax is added to the retail price for applicable residents.
22:40 - How to think about US federal income taxes when your company is based in a high-tax jurisdiction, such as some European countries.
People and entities in higher-tax countries could use a tax strategy where they receive a US foreign tax credit in their own country. This is definitely a strategy to get good advice on!
24:08 - Stewart’s outlook on the tax system for ecommerce.
Stewart sees the new technology and reporting created by companies like Amazon as making it harder for individuals and businesses to evade taxes. The Federal and State governments could become more aggressive with requiring platforms like Amazon to facilitate tax reporting & collection.
26:45 - What are the tax implications depending on the type of US legal entity which is set up - a Corporation, or LLC?
There are few situations where setting up a Corporation makes sense. This is because Corporations immediately create a tax liability, as they are a US ‘person’. LLCs on the other hand are often ‘Disregarded Entities’ where the income is passed through and taxed at the owner’s personal income tax rate.
I hope that this interview answered some of those burning questions that you have if you’re a non-US company or individual looking to sell your brand’s products on Amazon.com. If you have a question for Stewart, add it in the comments section below. You can also find him at ustax.bz where you can request a consultation.
Read more on this topic in our previous article: State Sales Tax for Amazon FBA Sellers: An Accountant's Perspective