Over the past several years, dropshipping and third-party fulfillment have become popular business models in eCommerce for international sellers who want to sell products to U.S. customers. Using this method, international merchants can sell to customers in the United States without actually having to be physically located in the U.S. Dropshipping and fulfillment services will pick, pack, and ship products to customers, as well as, provide services such as product returns. And as we’ve found out working with our very successful international seller clients, there’s money to be made if you do it right.
However, this model does come along with some important considerations regarding eCommerce taxes in the U.S. Here are some tax tips for international sellers entering the U.S. market.
What Platforms Can I Use to Sell to U.S. Customers?
There are several platforms that international sellers can use to sell their products to U.S. customers. These services include:
With Fulfillment by Amazon, sellers ship products to Amazon and set up a merchant name to sell in Amazon’s listings directly or their own online store with WebStore by Amazon. Then Amazon fills the orders after customers order the merchant’s products. Customers can purchase and pay for the items via the Amazon U.S. site and Amazon will provide customer support on all of the products that the merchant sells.
Shopify allows online merchants to create an online store in just minutes. The platform allows merchants to create their own standalone websites which they can brand to their businesses. Shopify provides a payment gateway, Shopify Payments, so that merchants can collect payments via their online stores. While Shopify does not offer fulfillment services directly, they do recommend using third-party fulfillment service, like Fulfillment by Amazon or Shipwire, to ship products to U.S. customers.
eBAY is a popular auction site where international merchants can sell to customers in the U.S. The setup is similar to Amazon with the exception that it is your sole responsibility to find a package forwarding service that can ship your products to your U.S. customers.
When you sell on eBay, payments will be handled by Adyen, which is eBay’s exclusive payment service. Your eBay storefront will be hosted on the eBay website. However, eBay does allow you to modify the look of your store to a certain degree so that you can brand your eBay listings.
Rakuten operates the largest e-commerce site in Japan and operates globally. It is also a place where international merchants in several countries can sell to customers in the U.S. Rakuten offers a service called Rakuten Super Logistics that can be used for selling on Rakuten Marketplace. This service also integrates with Shopify. With this service, merchants can drop ship or receive fulfillment services for their products.
Your Own Website
Another option to sell products online is to simply set up your own website using an eCommerce platform and finding your own distributor / logistics company in the U.S. However, this might require a bit more expertise given that many eCommerce platforms are designed by default for selling within a single country or limited international locations.
What Taxes Do I Need to Pay?
Now that you have a platform in mind that you would like to use to sell to U.S. customers, you’ll need to figure out what U.S. taxes you’ll be responsible for. The rules for taxation will vary depending on whether you are selling to U.S. customers as a sole proprietor or whether you have set up a business entity for your business. Generally, you will owe taxes on net profit, that’s earnings less your business deductions. In some cases, you will also owe taxes on sales. Here is a quick overview of what is involved for individuals and business entities.
Taxes for Individuals
U.S. non-residents are not required to pay U.S. taxes if they don’t operate in U.S. and only sell into the country. This means that you don’t have an established nexus in the U.S., which can refer to an office or fulfillment center that you own in the U.S. Only those merchants who have an employee or “agent” in the U.S. are required to pay U.S. taxes.
However, if you are actually a U.S. citizen living abroad, all of the tax rules that apply to you as a U.S. citizen will also apply to your eCommerce business as well. U.S. citizens that sell in the U.S. pay taxes on income earned worldwide.
LLC vs Corporations
Depending on who you do business with, vendors and distributors may prefer to work with a U.S. entity. Also, there may be financial benefits to having a U.S. entity for other reasons such as building credit. Having good business credit history with a U.S. bank account can make you eligible for approval. Business credit is ideal for stretching inventory, covering expenses in slow periods, and for other investments. Your U.S. business entity will need at least a year or two of financial history including tax returns, financial records, and cash flow statements. You can own a U.S. entity without having U.S. taxes, however, you will have reporting requirements to establish the connection between you as a U.S. non-resident and your business.
Although international sellers are aware that they have protection as a result of U.S. tax treaties, they may not be aware of the fact that they still could be subject to the rules of U.S. states that impose sales tax. The main factor that will determine whether you are required to pay sales tax in the U.S. is whether you have engaged in activities that establish “nexus” in a specific state.
Any of the following activities may create “nexus:”
- Using an agent based in the U.S. to fulfill orders on behalf of your company.
- Storing inventory in a U.S. fulfillment center where you own the product inventory until customers purchase it.
Each state has different rules for what establishes “nexus.” If you are required to register, you will need to apply for a sales tax permit, which is the license that allows a seller to collect sales tax. In order to register for a sales tax permit, you must have a U.S. address, an IRS issued Employer Identification Number (EIN), and an officer or owner of the company who has an Individual Taxpayer Identification Number (ITIN) or Social Security Number. The sales tax is collected from customers and must be paid by specific dates each year with a filing frequency to be determined by that state’s sales tax authority.
Contact the states in which you have established “nexus” to find out what the rules are for applying for sales tax given that you might not be able to use their online registration forms outside of the U.S. All states have different names for the sales tax authority. In some states, the agency with which sellers register is called the Department of Taxation, while in other states it might be referred as the Department of Revenue.
Getting Set Up
Aside from taxes, you’ll also need to set up a few additional things in order to sell into the U.S. The most common requirements for U.S. eCommerce platforms include:
- A credit card that can be charged internationally (e.g. a Mastercard or Visa). This card is charged by the eCommerce platform for monthly fees and third-party selling services.
- A local bank in your country that supports ACH (automated clearing house). This will allow you to accept electronic deposits for sales. Additionally, you may also want to obtain a USD bank account if available in your country to better manage converting your earnings to your local currency.
- Your local physical address.
- The eCommerce platform must support your currency/country. This is typically not an issue for most English speaking countries. Make sure to check the list of countries supported by the platform before setting up your account.
- A phone number (you’ll also need your international prefix number).
- A U.S. EIN number. You don’t have to establish any type of legal status in the U.S. in order to obtain this number. You simply fill out online form 10-BEN on the IRS.gov website. The Internal Revenue Service (IRS) is the U.S. government’s tax collection agency.