Non-resident Alien Selling on Amazon

As a general rule selling on Amazon is considered US sourced income and requires filing a US federal income tax return. In the case of one non-resident owning an LLC that is selling on Amazon, that means the owner files a form 1040NR with a Schedule C to report the income and expense of the business. If the LLC has more than one owner, then it will require filing a Form 1065 Partnership Return for the LLC and then each individual owner will file an individual non-resident US return.

You also have the option to elect to have the LLC taxed as a corporation, which in many cases will allow the individual owners to avoid filing a US return, but it means the LLC will file a separate US Corporate Tax Return, Form 1120. There are a number of pros and cons to this approach and I suggest you have a conversation with a US tax professional before making a corporate election to be sure you understand how that will impact your tax situation.

Depending on which state the LLC is registered in, you may also need to file a state income tax return and will most definitely need to file a state franchise tax return. In many cases the state franchise tax is coordinated with the state income tax or is simply an annual fee.

You will also probably have requirements to register and pay income tax, franchise tax and sales tax in several other states. FBA by Amazon creates an agency relationship with Amazon which gives the LLC nexus (Understanding nexus and sales taxes) in any other state where Amazon stores your inventory. That will require you to register the LLC with those impacted states and file tax returns with those states.

What makes FBA different?

Generally speaking Amazon FBA creates an agency relationship between you and Amazon, which makes Amazon your agent in the US. Under most tax laws that means you have a physical presence in the US and in a large number of states in the US because your agent (Amazon) is physically located in the US and in a number of state in the US.

I see this situation treated incorrectly a lot, because people tend to focus on the exclusion that is commonly available under tax treaties and tax statutes to exempt income when you are simply using a third party for storage of inventory and fulfillment of orders. The problem is the FBA program empowers Amazon to do a lot more for you than simply store inventory and ship orders. They choose shipping methods, inventory levels and authorize customer returns and credits. All those activities pretty clearly rise to the level of Amazon being your agent in the US and that is an important distinction under most US federal and state tax laws. Yes Amazon is an independent agent and so that offers you some cover, but more for federal taxation than state.

Filing Obligation

You should be filing a US federal income tax return. The form depends on how your LLC is taxed-sole proprietorship, partnership or c corporation are your choices. Since you are a non-resident alien, an S Corp is not available.

Assuming you are the sole owner and have not made an election to have the LLC taxed as a corporation (the most common situation), then you file Form 1040NR, U.S. Nonresident Alien Income Tax Return.

The downsides of not filing

If you are not yet convinced, let me spell out some of the consequences of not filing. When you file a return, the IRS has 3 years to go back and challenge what you reported. It is called a statue of limitations. When you don’t file a return, the IRS can go back to day one of your business, because you didn’t file a return, so there was nothing to trigger the statue of limitations.

Ok still not convinced? When you file the return, the IRS can go back three years and they can challenge the income and deductions you reported, but you get to defend that your numbers are accurate. When you don’t file a return, you don’t get to take any deductions. You simply pay 30% tax on your gross receipts. Given that a really good Amazon seller is making 10% bottom line profit, you just lost all your profit and then some.

You should note that you probably also have state registration and reporting obligations because as a general rule you are subject to collecting sales tax and reporting and paying income and/or franchise tax in any state where Amazon stores your inventory.