Are you a foreign company selling on Amazon’s U.S. marketplace? Do you use Amazon’s Fulfillment by Amazon (“FBA”) service?
If you answered “yes” to these questions – you will want to read this post!
When I first started blogging about U.S. Sales Tax for Foreign Sellers, I wrote a post about tax treaties and U.S. sales tax nexus and explained what foreign sellers need to know. I thought that this would be an important topic because many foreign sellers believe that they don’t have to worry about state sales taxes if they are from a country that has a tax treaty with the United States.
And sure enough, the comments, questions and requests for more information began to pour in which confirmed that this was an important topic! I also noticed that many of the comments and questions that I answered came from foreign sellers that use Amazon’s FBA service and that many of those sellers were surprised that using Amazon’s FBA service creates a requirement for them to collect sales taxes in the United States.
You see, as I explain in my Tax Treaties post, the states are not a “party to” and not bound by a tax treaty that our federal government enters into. So even if a foreign seller is not subject to U.S. federal income tax, a foreign seller could be subject to the sales tax laws of the various U.S. state and local governments if they have “nexus” to a state.
Before I explain why foreign sellers that use Amazon’s FBA service have to collect sales tax, I should explain a very important term that we use here in the United States when explaining why an out-of-state or an out-of-country seller (we call these “remote sellers”) must collect taxes in a state. That term is called “nexus”, which means a “connection or a tie." A state cannot impose its taxes (corporate taxes, business taxes) and cannot impose its requirements (such as a requirement to collect sales taxes) on a remote seller unless the seller has a sufficient "nexus" to the state. For nexus to be created, a physical presence in a state must exist.
But here is something that many sellers – both U.S. and foreign sellers – are surprised to find out. A remote seller can have a physical presence in a state even if they do not have an office or store in the state or even if they have never set foot in a state. A physical presence can be created by many "less than obvious" activities, such as simply having inventory in a warehouse and/or by using an independent agent in a state.
When a foreign seller uses Amazon’s FBA service, they send their inventory to an Amazon warehouse in one or several states where it is stored and prepared for shipment to the foreign seller’s U.S. customers. This inventory is still owned by the foreign seller – which means the foreign seller has physical property in a state. (Remember, Amazon does not take ownership of that inventory – the seller continues to own the inventory.) In general, most states would say that having inventory in a state creates a physical presence nexus.
But there’s more. When foreign seller uses Amazon’s FBA service, Amazon acts as the seller’s agent in the state and fulfills an obligation of the seller (Amazon fulfills the order on behalf of the seller). Here again, we have another activity that most states would say creates a physical presence nexus.
I’ll use California’s law as an example. A remote seller has nexus in California (and a requirement to register and collect tax on sales to California customers), if the remote seller is “engaged in business” in California, which the California law defines as:
- Owning or leasing real or tangible personal property….. in California ,
- Maintaining, occupying or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California,
- Having a representative, agent, salesperson, canvasser, independent contractor, solicitor, or any other person operating in California on the retailer’s behalf, including a person operating in California under the authority of the retailer or its subsidiary, for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property….
As you can see, it is pretty clear that having inventory that is owned by the foreign seller in an Amazon warehouse and using Amazon’s FBA service to fulfill customer orders on behalf of the foreign seller creates that physical presence nexus in California.
So what should a foreign Amazon FBA seller do?
If a foreign Amazon FBA seller wants to be in compliance with our U.S. sales tax laws, the seller will need to evaluate in which states they have nexus and get registered with the various states for tax collection purposes.
But this is complex topic! A foreign seller may not realize they need to register with each individual state, or how to go about getting registered or what the requirements to register are. I often advise foreign sellers on how the U.S. sales tax laws apply to them and assist them in getting in compliance with the state sales tax laws. And to help our readers understand this process, in the next few weeks I’ll be writing two more posts to explain in more detail what foreign Amazon FBA sellers need to know about getting in compliance with the U.S. sales tax laws. In the next post I’ll start by explaining the U.S. taxpayer identification number requirements and why these are required for Amazon FBA sellers. After that, I’ll write another post explaining what foreign Amazon FBA sellers need to know about registering for state sales tax collection purposes.
Yes, complying with the U.S. sales tax laws is a complex topic - not only for foreign sellers, but even for U.S. sellers too! I invite you to follow this three-part blog series that will help Amazon FBA sellers understand and get into compliance with the U.S. sales tax laws.
Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:
- U.S. Sales Taxes: Filing Frequency for International Sellers
- 7 Key Points Foreign Sellers Should Know about U.S. State Taxes
- Do International Sellers Registering for Sales Tax Need a U.S. EIN?
- International Sellers and U.S. Sales Tax Registration: 3 Key Issues
- U.S. Sales Tax for Amazon FBA International Sellers