Tax tip – Fulfillment by Amazon (FBA) and its impact on a non-American’s U.S. tax obligations
As the growth of Fulfillment by Amazon (FBA) has exploded in recent years, many non-Americans (i.e. nonresident aliens) around the world have realized that they could also become major retail or even wholesale merchants on Amazon despite the physical distance from their customers living in the U.S. However, along with the opportunity has come additional tax considerations. Below are some important points to be aware of:
1. Selling via FBA generally results in a situation in which the seller is storing inventory in a U.S. warehouse (belonging to Amazon) and selling the merchandise to U.S. customers – thereby causing the associated income to be classified as “effectively connected income” (see I.R.C. Section 864).
2. Effectively connected income is subject to U.S. income tax regardless of the fact that a nonresident alien might live outside the U.S. and have no other physical connection to the U.S. (aside from inventory storage in FBA warehouses).
3. There is one important exemption to the above- if the nonresident alien qualifies for and elects to be taxed under the provisions of an international U.S. income tax treaty (e.g. U.S.-Switzerland Income Tax Treaty), the income in question will not be subject to tax as long as a “permanent establishment” does not exist in the U.S. Notably, a nonresident alien who is a FBA seller generally does not have a permanent establishment in the U.S. merely because of the storage of inventory in FBA warehouses.
4. Using FBA will always create a U.S. tax filing requirement for a nonresident alien (to either report and pay taxable income arising from ECI or to claim tax treaty benefits).
As always, you should not rely on the above as legal advice. However, if you need assistance with the U.S. tax matters, please feel free to contact us.