Registrations, regulations, and complications – tax planning for international Amazon sellers in the US
In many ways, Amazon is a boon for international businesses wanting to break into the US market. It offers sellers a ready-made platform for sales, and even provides other services such as fulfilment and shipping. But doing business in the US isn’t as simple as Amazon might make it seem. Prospective ecommerce sellers need to consider state and federal tax laws, banking regulations, and business registration – and they need to get the paperwork organised before they start selling. Wray Rives is a US-based chartered accountant who specialises in virtual services and non-US clients looking to get into the US. After 30 years in the accounting field, and eight working with overseas clients, he knows the ‘quirks’ of the US tax system well. He explains that sellers need to be aware of what they’re getting into – and recommends that they seek expert advice before making any big decisions. Here are some of the complications to consider: How to register as a business Many of Wray’s clients come to him because they want to set up a business in the US, which allows them to open a US Amazon merchant account. By going through this process, sellers can end up paying only 1-2% in tax on sales, rather than 2-7% if they’re based offshore. This can make a huge difference to ecommerce businesses with tight margins – in fact, it could mean the difference between making a profit or a loss. In the US, establishing a business entity is pretty simple if you know what you’re doing – but if you get it wrong, you could be liable for US Federal taxes and fees, which can be significant. The key is knowing whether to register as an LLC or a corporation. An LLC tends to be simpler to manage, allowing business owners to pay taxes as part of their own income tax return. For this reason, Wray says that for most small ecommerce sellers an LLC is the best option. But that’s not always the case, so it’s best to seek personalised advice before you make the decision. Wray explains: “I get a lot of clients who come to me and they’ve done it wrong, got bad information. It ends up costing more to get it fixed, whereas if they got good advice from the beginning it would be cheaper.” The best place to register as a business A country with 50 states, all with differing tax codes and business regulations, offers a wide range of options when it comes to registering your business. If you’re a successful Amazon retailer, you may end up needing to register your business in up to 32 states – Wray says that most businesses making over $1 million a year have to register in around 10-12 separate states. Despite that, you do need to register in a single state first, to establish your business as an entity. If you don’t live in the US, you likely won’t have a particular state that makes sense for your initial registration, so you’re free to choose. According to Wray, misinformation in this area has led many business owners to register in Delaware, following the thinking of Facebook, Apple and Coca-Cola that it’s the best place to set up as an entity. But this is not accurate for most ecommerce sellers. Wray recommends registering in Wyoming instead, mostly because the state sets business regulation fees at $50-$250 – in contrast, Delaware can charge up to $180,000. Again, Wray explains, it’s best to seek advice before wading into the market, as differences in costs and taxes can be staggering. Amazon, agents, and tax implications Some of the complications in the US tax system come from clashing state and federal laws. Generally under federal law, as Wray explains, if you have an agent representing your company with a physical presence on US soil, you’re required to pay taxes in the US. At present, despite the fact that Amazon meets many of the criteria for an agent, federal law does not recognize them as such. On the other hand, most states do – which means you could be required to pay taxes in some states, but not at the federal level. While Wray believes that this is an evolving area of federal law which is likely to change soon, it is something to be aware of. Setting up a bank account According to Wray, setting up a bank account in the US can be surprisingly complicated. While many prospective business owners think that registering a US-based business entitles them to a bank account, this is not actually the case. Corporate tax regulations and banking regulations are unrelated. Federal banking regulations state that any entity wishing to establish a US bank account must have a real person tied to the account. Most banks interpret this to mean that the person needs to physically visit the bank with identification – and passport, for internationals – so the bank knows that a real person is responsible for the account. These regulations are intended to prevent fraud and money laundering, but they can make it difficult for overseas businesses. Some businesses provide a way around the regulations, offering to set up a US bank account and register your business remotely. However, Wray warns, there is almost always a catch. If you get a business to set up a US bank account on your behalf, they will have a designated person to act as a member of your business and open the account. They will then hand over online banking information to your business, but this doesn’t give you absolute control over your own account – the bank will still see the person from the other business as your representative. What’s more, these businesses will often set up your business as a corporation, rather than an LLC, which makes you liable for US tax immediately. If you go through an accountant to set up an LLC, this may not be the case. Wray explains: “These companies are trying to make it a one-size-fits-all…there can be downsides. You will be liable for tax, while if you had set up an LLC you wouldn’t necessarily be. These businesses were set up for start-ups, for ecommerce sellers.” Of course, these aren’t the only considerations for Amazon sellers. Once you actually start selling products through Amazon, you also need to deal with their fees and quirks. That’s where A2X comes in, we make Amazon accounting easy!
About Wray Rives, NeedaCPA.com Wray is a CPA and CGMA, with over 30 years of experience in accountancy and tax advice. Wray’s firm NeedaCPA.com operates 100% online, with over 50% of its clients based outside the US. Wray has deep experience handling the US expansion of international companies and helping to navigate the complex tax and corporate environment, he’s a highly rated contributor on Quora specializing in tax advice. Contact: NeedaCPA.com
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