Legal Obligation for a Overseas Amazon Seller in USA

Amazon FBA

Know your legal obligations while selling over third party plate-form (e.g. Amazon, Wayfair)

The United States taxation system can be difficult to understand, especially for foreign nationals doing business in USA. A foreign national may be subject to one of two drastically different systems of taxation by the United States depending on whether he/she is classified as a resident or a non-resident alien of the United States. The determination of residency status is critical.Normally foreigner are considered as non-resident due to physical non presence in USA but that doesn’t exempt them from complying with local tax laws.

How do you know you are liable for US tax laws: 

In general, to determine how your U.S. earned income should be taxed, you will need to determine your company’s involvement in the U.S. by checking if any of the followings apply to you,

Level 1. Your company does have any connections to any of the U.S. suppliers/vendors, Customers or having any offices and any employees on the U.S. soil.

Level 2. Your company is using U.S. suppliers and logistics (i.e., Fulfilled by Amazon or other 3rd Party Logistics) to produce revenue, but does not have employees, office or warehouses in the U.S. In that case, your company is deemed to be “engaged in a trade or business in the United States (ETBUS)” and have generated “Effectively Connected Income (ECI)”.

Level 3. Your company has an office or employees in the U.S. (i.e., fixed place of business). You regularly conduct business with U.S. companies. You have continuous projects (over 12 months) or you provide services for 183 days or more in the U.S. In those cases, you will be deemed to have an Effectively Connected Income (ECI) and a Permanent Establishment (PE) in the U.S.

What constitutes an Effectively Connected Income (ECI) for Canadian Amazon Sellers?

In order to have ECI in the U.S., you need to have business activity in USA. Examples of that activity include:

  • Using 3rd Party Logistics (3PL) like Amazon FBA, Wayfair
  • Use of U.S. facilities (warehouses, storage, display)
  • Passing the title of imported goods in the U.S. (if you are importing from another country)
  • Using dependent agents (like employees or salespersons) to conduct business in the U.S.
  • Having a US-based bank account.

Legal Obligation and Requirements for a seller selling product over Amazon/Wayfair or similar service provider:

Non-resident aliens are normally taxed only on income derived from US sources. US-source income that is considered “effectively connected” with a US trade or business. If you are one of those matches with any of the above classification for business doing in USA, you are liable for the followings as per Federal and State Income Tax Laws-

  • Register your business in USA
  • Apply for EIN/Federal Tax ID number for the business
  • Register your business for sales/use taxes in particular state/s
  • File your Sales and Income Tax Returns to IRS and particular state/s periodically

Consequences for the non-compliance:

  • Penalties and Interest on taxes due shall be imposed and keep building up over the period and that could lead to file for bankruptcy in USA
  • Any such non-compliance could lead to freezing business and/or bank accounts for the businesses till all dues are paid
  • In case of intentional non-compliances or omission assuming other factors involved personal liability could come on person-in-charge of the company (e.g. foreign national)
  • Practically such business and beneficiary/person-in-charge could fall in so call, black or observation list maintain and followed by Treasury department and FBI
  • Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined up to $100,000 ($500,000 in the case of a corporation), or imprisoned up to 5 years, or both, together with the costs of prosecution
  • In addition any such handling of the government notices and cases would incur lots of fees charge by the Accountant and Lawyers