Amazon Sales and US Federal Taxation
From a U.S. federal tax perspective, the extent to which the U.S. government can impose federal taxes on an international merchant depends greatly on the level of connectedness that the seller has to the United States.
Whereas “nexus” is the key principle in this regard in the area of state taxation, federal tax is triggered if the activities of a foreign seller in the U.S. rise to the level of a “U.S. trade or business” or “USTOB,” and the seller’s income is effectively connected to such U.S. trade or business.
In this regard, changes to the sourcing rules under the Trump Tax Reform has significantly affected the extent to which sales of products into the U.S. via Amazon should rise to the level of a USTOB.
In the case that a foreign seller is resident in a country that has an income tax treaty with the U.S. (which generally trumps U.S. domestic law), a foreign seller’s U.S. business profits may be exempt from U.S. taxation so long as they are not attributable to a “permanent establishment” or “PE” in the U.S. The PE threshold is generally considered to be more taxpayer friendly than the USTOB threshold.
Amazon Sales and US State Taxation
From a state tax perspective, Amazon international sellers are potentially subject to two main methods of taxation – sales tax and income tax. The fundamental principle underlying a state’s right to tax transactions under both of these methods is “nexus,” which generally means the connection a taxpayer has to a particular state.
Just as state tax rates are determined on a state-by-state basis, so are the parameters of nexus. Some states focus on so-called “physical presence” (e.g., employees or property within the state), while others focus on so-called “economic presence” (e.g., a significant amount of sales within the state) or other factor methodologies.
A layer of complexity is added by the fact that nexus is often defined differently for sales and income tax purposes. In this regard, a recent Supreme Court case has widened the reach of sales tax for online retailers, ruling that internet retailers can be required to collect sales taxes even in states where they have no physical presence. This has had a significant impact on international sellers who use Amazon to sell products to U.S. customers online.
How We Can Help
Yes, Expat Tax Professionals is the premier online tax preparation firm for U.S. expats. But aided by our mastery of cross-border tax issues, we also provide invaluable advice to help non-US persons navigate their entry and operations in the U.S. market, particularly via Amazon.
Selling via Amazon presents a host of substantive and tax reporting challenges. Our experts are at the ready to advise you on structuring and planning to optimize your filing position, as well as to assist with the preparation of all required U.S. tax forms.
Our diligence combined with confidence stemming from our deep understanding of the U.S. tax law guarantees that we find the best solutions to every challenge.