By Ines Zemelman. Founder of Taxes for Expats
One of the many ways in which the world is smaller thanks to technology is the ease with which a non-US seller can sell products in the United States. Amazon.com is among the easiest of ways to do this. Like almost every business venture, there are tax consequences to consider. The impact on a seller’s taxes depends on a few things, including whether the seller is a business or an individual, and on whether there is a tax treaty agreed between the seller’s country of residence and the United States.
There is a significant difference in United States tax impacts depending on how a non-resident alien sells their merchandise. Is the sale made:
- via a non-United States company?
- via a United States LLC that is registered in the merchant’s name?
- by an individual non-resident alien (NRA)?
It is also important to determine if the seller’s country of residence has an agreed tax treaty in place between them and the United States.
We can examine the United States tax implications for each possible scenario.
The Merchant’s Country of Residence Has an Agreed Tax Treaty
For sellers living in one of the countries with an agreed tax treaty, there are three scenarios:
Non-resident alien selling as an individual
- Request an Individual Tax Identification Number (ITIN)
- Use form W8-BEN to claim treaty benefits. Although Amazon’s fees are still applicable, this form enables the exemption from tax withholding on sales proceeds. This form is submitted directly to Amazon.
- Amazon will send a form 1099K for the tax year if the merchant’s sales exceed 200 transactions and USD 20,000.
- The seller must file a form 1040NR, but the tax treaty should exempt the sales income from tax. There is a specific schedule that must be filed with the 1040NR tax return to claim this exemption. This schedule is often done incorrectly, even by professionals who aren’t familiar with the details of tax treaties. Using a specialist tax preparer like Taxes for Expats is recommended.
- If the threshold for issuing a 1099K was not met and it was not issued by Amazon, then form 1040NR does not need to be submitted.
Selling Through a United States LLC Registered In the Seller’s Name
- Request an Individual Tax Identification Number (ITIN) for the seller
- Request an Employer Identification Number (EIN) for their LLC
- Submit form W-9 on behalf of the LLC. This provides the Employer Identification Number to Amazon. They will not apply withholding.
- United States reporting requirements for non-resident alien owners of United States LLCs are complex. A professional like Taxes for Expats can help prepare the necessary forms.
- The United States LLC is classified as a “disregarded entity,” which qualifies for treaty benefits identical to those for individuals.
- The LLC files form 1040NR. This schedule is often done incorrectly, even by professionals who aren’t familiar with the details of tax treaties. Using a specialist tax preparer like Taxes for Expats is recommended.
Selling Through a non-United States Corporation With a Tax Treaty
- The corporation requests an Employer Identification Number (EIN).
- Use form W8-BEN-E to claim the treaty benefits. Although Amazon’s fees are still applicable, this form enables the exemption from withholding on sales proceeds. This form is submitted directly to Amazon.
- At the end of the tax year, submit form 1120-F to the IRS. Assuming the tax treaty allows for the exemption, no United States tax will be due. Again, many tax preparers are not familiar with these forms – so using a specialist tax preparer like Taxes for Expats is recommended.
Why a United States Tax Return With No Tax Due?
Many taxpayers will wonder why they must file a United States tax return if there is no withholding and no tax due because of the treaty exemptions.
Although there is no tax obligation and no withholding to claim a refund against, the income is still reported to the Internal Revenue Service (IRS) by Amazon. Without the filed return and the appropriate forms to claim the exemption, the IRS will not know the income is exempt and will consider it taxable. They will send the seller a bill for the tax to the address on file at Amazon.
The Merchant’s Country of Residence Does Not Have an Agreed Tax Treaty
For sellers who live in one of the countries without an agreed tax treaty, the scenarios and procedures are virtually identical to those described above. The obvious difference being that the exemptions allowed by the tax treaty will not be available. Because these exemptions do not apply, 30% tax withholding will be taken by Amazon from the merchant’s sales. But not to worry, usually a portion of this can be refunded when the seller submits their annual tax return to the IRS.
Why a United States Tax Return if Tax Was Withheld?
If tax was withheld by Amazon, why does the seller need to file a US tax return? United States tax law is complicated, and the tax owed is almost always different than the amount withheld. Fortunately, it is usually lower than the amount withheld due to deductions for selling expenses.
- Amazon withholds 30% of sales, but does not adjust for expenses like their seller fees, cost of goods sold (COGS), credit card fees, etc.
- By filing a United States tax return, the seller calculates and presents to the IRS the actual tax they owe, which is based on net income as opposed to gross income.
- The 30% withholding rate is a drastically simplified number that ensures sufficient tax is withheld.
- United States tax rates are incremental, beginning with 10% and increasing to 30%, which is the maximum for non-resident aliens. Submitting a United States tax return allows the excess withholding to be refunded.
Professional Tax Preparation
Tax law is complicated, especially when dealing with international treaties. Engaging the services of a professional who specializes in international tax law is almost always the right choice.