Amazon through their FBA program, makes it easy for online sellers to operate an online store. It has in fact opened up the US consumer market to a lot of non-US individuals who may not be aware that they are creating an obligation to file US tax returns.
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 states 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.
If you are an Amazon FBA seller, 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 (the most common situation) and have not made an election to have the LLC taxed as a corporation, 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.
Guest Post Contributed By:
Wray Rives, CPA CGMA