American E-Commerce Business Alliance

March 2026

RE: Existing Authority Under IRC §864 and the Tax Cuts and Jobs Act to Tax Foreign E-Commerce Sellers Operating in the United States

Dear Commissioner:

On behalf of the American E-Commerce Business Alliance (AEBA), a coalition of American businesses advocating for a fair and level digital marketplace, we are writing to bring to your attention a critical finding: the IRS already possesses the legal authority to tax foreign e-commerce sellers operating through U.S. marketplace platforms — no new legislation or treaty renegotiation is required.

Foreign sellers — particularly those from China — generate an estimated $220 billion or more in annual U.S. marketplace sales across Amazon, Walmart, Temu, Shein, TikTok Shop, and other platforms. They store inventory in American warehouses, ship to American consumers, and use American infrastructure. Yet they pay zero U.S. income tax, based on interpretations that these activities do not constitute permanent establishment under the 1987 U.S.-China Income Tax Treaty.

We respectfully submit that this interpretation is incorrect — and that existing domestic law, properly applied, already requires these sellers to pay U.S. taxes.

Alignment with Administration Revenue Priorities

President Trump has made clear that the United States should generate revenue from foreign sources rather than increasing taxes on American citizens. The creation of the External Revenue Service reflects a stated priority: collect revenue from those who profit from the American market, not from the American taxpayer.

The enforcement actions outlined in this letter are directly aligned with that priority. Applying existing law to foreign marketplace sellers would recover an estimated $9 to $60 billion in annual revenue — entirely from foreign entities who are profiting from American consumers and American infrastructure. This revenue comes without raising taxes on a single American citizen, without creating a single new tax, and without imposing a single new tariff. It is simply the collection of taxes that are already owed under existing law but are not being enforced.

At a time when the Administration is actively seeking revenue offsets for the tax relief provided to American families and businesses through the One Big Beautiful Bill Act, this represents one of the largest untapped sources of federal revenue available — and it comes exclusively from foreign sellers, not from American taxpayers.

The Cost of Inaction

This is not an abstract policy question. The failure to apply existing law is causing measurable, escalating harm to American businesses and the U.S. economy:

• 1.9 million American small businesses compete daily on the same marketplace platforms against foreign sellers who pay no U.S. income tax — a built-in cost advantage of up to 50.3% (combined federal and state rates) on every transaction.
• $9 to $60 billion in annual federal and state tax revenue is forfeited — revenue that would be collected if existing law were applied to foreign marketplace sellers at the same rates imposed on their American competitors.
• Over 15,000 U.S. retail stores are projected to close in 2025 alone. While multiple factors contribute, the structural cost advantage enjoyed by untaxed foreign sellers operating on the same platforms is a significant and accelerating contributor.
• For many of these foreign sellers, particularly Chinese entities, U.S. marketplace sales represent their sole or primary source of revenue. They are not auxiliary participants in the American market. They are full-scale commercial operations — selling to American consumers, from American warehouses, on American platforms — while bearing none of the tax burden that American businesses carry.

Every day that existing law goes unapplied, American businesses close, American tax revenue is lost, and the competitive imbalance deepens. The cost of inaction compounds.

I. IRC §864 Already Establishes a U.S. Trade or Business

Under IRC §864(b), a foreign person is engaged in a “trade or business within the United States” if they conduct substantial, continuous, and regular business activity in the United States. Foreign marketplace sellers who perform all of the following activities clearly meet this threshold:

1. Store inventory in U.S. warehouses (Amazon FBA, Walmart WFS, or third-party facilities)
2. Fulfill orders from U.S. soil to U.S. consumers
3. Generate substantial, continuous revenue from U.S. customers
4. Set and control pricing for U.S. consumers in U.S. dollars
5. Create, manage, and optimize product listings with U.S.-targeted content
6. Manage advertising campaigns targeting American consumers (sponsored products, PPC, display ads)
7. Conduct customer service — responding to American buyers' questions, emails, and complaints
8. Manage returns and refund processes for U.S. customers
9. Monitor and adjust inventory levels across multiple U.S. fulfillment centers
10. Use U.S. payment processing and financial infrastructure

We wish to emphasize that this is not “warehousing through an independent agent.” The seller controls every material business decision — pricing, marketing, content, customer relationships, inventory allocation, and market strategy. The platform provides logistics services, but the business is the seller's. For many of these sellers — particularly Chinese entities — U.S. marketplace sales represent their sole or primary source of revenue. This is their entire business in the United States.

When a foreign person is found to have a U.S. trade or business, their income becomes Effectively Connected Income (ECI) under IRC §871 (individuals) and §882 (corporations), taxable at standard U.S. rates. They are required to file Form 1120-F or 1040-NR and pay taxes on their U.S.-sourced profits. This is existing law — not a new tax.

II. The Tax Cuts and Jobs Act of 2017 Strengthened This Authority

The Tax Cuts and Jobs Act (P.L. 115-97), enacted December 22, 2017, further strengthened the framework for taxing foreign activities in the United States:

1. Section 863(b) was amended to source income from inventory sales based on production activities, clarifying income attribution for cross-border transactions.
2. Section 864(c)(8) was added, establishing that gains from sales of partnership interests in U.S. trades or businesses are effectively connected income — reinforcing the principle that economic participation in the U.S. market creates tax obligations.
3. The TCJA amplified scrutiny on foreign activities and clarified that inventory storage can signal a permanent presence and increase PE risks.

III. The “Later in Time” Rule: Domestic Law Can Override the Treaty

A central argument used to shield foreign sellers from U.S. taxation is that the 1987 U.S.-China Income Tax Treaty exempts “storage for delivery” from permanent establishment under Article 5(4). We submit that this exemption is no longer controlling, for two reasons:

First, under the “later in time” rule codified in IRC §7852(d), U.S. domestic statutes and tax treaties have equal legal standing. Where the two are inconsistent, the later-enacted provision may prevail. The TCJA was enacted in December 2017 — thirty years after the treaty took effect. The TCJA's expansion of U.S. taxing jurisdiction over foreign activities should be interpreted in light of these strengthened standards — particularly when applied to business models that did not exist when the treaty was negotiated.

Second, the treaty's Article 5(4) exemption applies only to activities that are “solely” for storage, display, or delivery — and only when those activities are preparatory or auxiliary to the enterprise's business. For a seller whose entire U.S. business consists of storing goods in American warehouses and delivering them to American consumers, these activities are not auxiliary. They are the business. The 2017 OECD revisions to the Model Tax Convention added an explicit anti-fragmentation rule (Article 5, paragraph 4.1) that prevents the preparatory/auxiliary exemption from applying when the activities constitute a “cohesive business operation.”

IV. The Wayfair Precedent: Economic Presence Is Sufficient

In South Dakota v. Wayfair (2018), the Supreme Court held 5-4 that physical presence is not required to establish tax nexus. Economic presence — measured by sales volume and transaction count — is sufficient. Justice Kennedy wrote that the physical presence rule was “unsound and incorrect.”

Every state has since adopted economic nexus standards for sales tax based on this ruling. A seller with $100,000 in sales and no physical office owes state sales tax. Yet a foreign seller with $10 million in U.S. marketplace sales, inventory in five American warehouses, and 50,000 American customers pays little or no U.S. income tax. While Wayfair is not direct legal precedent for federal income tax, it demonstrates the broader shift in U.S. law toward recognizing economic presence as sufficient for tax obligations. IRC §864 — which predates Wayfair — already provides the independent legal authority for the same conclusion at the federal level.

V. The Treaty's Foundational Premise Has Failed

The treaty's PE exemption assumed that income would be taxed in the seller's home country. In November 2025, Chinese tax authorities ordered Amazon, AliExpress, Temu, and Shein to hand over seller revenue data for the first time — revealing massive underreporting. Over 780 sellers changed their Amazon entity to Hong Kong in a single month to avoid mainland China's tax reporting requirements. The treaty's fundamental premise — that sellers would pay tax at home — was a fiction. These sellers pay zero tax in the U.S. and zero tax in China. The income disappears entirely.

VI. The Enforcement Mechanism: Withholding at the Point of Sale

Even with clear legal authority, establishing tax obligations is meaningless without a mechanism to collect. The fundamental enforcement problem is this: foreign marketplace sellers are extraordinarily elusive. The evidence is unambiguous:

• When China required platforms to report seller revenue in November 2025, sellers didn't comply — 780+ changed their Amazon entity to Hong Kong in a single month to evade reporting. (Source: Bloomberg; Marketplace Pulse)
• Chinese sellers routinely establish U.S. LLCs as shell entities, not for compliance but for appearances — while profits flow to China untaxed. U.S. LLC registrations by Chinese operators surged nearly 400% year-over-year. (Source: EcomCrew; Marketplace Pulse)
• When enforcement actions are taken on marketplace platforms — for review fraud, IP theft, or safety violations — sellers close the account and reopen under a new entity the next day, with no consequence. (Source: EcomCrew; Nasdaq)
• Foreign sellers have no U.S. assets to seize, no office to serve process against, and no incentive to voluntarily file returns. An after-the-fact tax obligation is uncollectable from an entity that no longer exists.

If the IRS does not collect at the time of sale, it will never collect at all. The only enforcement mechanism that works against sellers who can disappear overnight is one that withholds before funds leave the United States. We do not recommend this as one option among many. We recommend it as the only approach that will actually result in revenue collection.

This approach has well-established precedent under existing law:

1. FIRPTA Withholding (IRC §1445). When a foreign person sells U.S. real property, the buyer is required to withhold 15% of the gross sales price and remit it directly to the IRS. The foreign seller never receives the untaxed proceeds. This mechanism has operated effectively for decades. An analogous approach could require marketplace platforms to withhold a percentage of payments to foreign sellers at the time of disbursement.
2. Compliance and Verification (IRC §3406). Foreign sellers who properly submit W-8BEN forms are generally exempt from backup withholding. However, we urge the IRS to strengthen compliance and verification requirements around W-8BEN submissions from marketplace sellers — particularly where sellers use multiple entity structures, U.S. LLCs owned by foreign corporations, or frequent entity changes (as evidenced by the 780+ sellers who switched to Hong Kong entities in November 2025 alone). The gap is not in the withholding rules but in the verification of claims made under them.
3. Adapting Existing Withholding Frameworks (IRC §1441/§1442). We recognize that marketplace disbursements for goods sold are not currently classified as FDAP income. However, we recommend that the IRS evaluate whether existing withholding frameworks — including §1441/§1442 — can be adapted to marketplace commerce, or whether new guidance is needed to create a withholding mechanism specifically designed for foreign marketplace seller disbursements. The principle remains: withholding at the platform level is the only enforcement approach that guarantees collection from sellers with no U.S. assets.

We note that marketplace platforms already possess the operational infrastructure to perform this function. Following South Dakota v. Wayfair, these same platforms now collect and remit state sales tax on behalf of third-party sellers in all applicable jurisdictions. The systems, data, and processes required to withhold and remit income tax are substantially similar to those already in place for sales tax collection.

Withholding at the marketplace level eliminates the enforcement gap entirely. The tax is collected before funds leave the United States. Foreign sellers who believe they have been over-withheld may file a U.S. tax return to claim a refund — which brings them into the U.S. tax system and creates the filing record that currently does not exist.

Requested Actions

Based on the foregoing, we request that the IRS take the following steps:

1. Issue Guidance Under IRC §864 and the TCJA. Publish a revenue ruling or formal notice declaring that foreign sellers exceeding $500,000 in annual U.S. marketplace sales or 200 separate transactions are engaged in a U.S. trade or business under IRC §864(b), generating Effectively Connected Income subject to U.S. taxation at standard rates. Sales should be aggregated across related entities and commonly controlled accounts to prevent threshold avoidance through fragmentation.
2. Assert the “Later in Time” Principle. Issue formal guidance clarifying that the TCJA's provisions regarding foreign business activity in the United States supersede the 1987 treaty's PE exemption under IRC §7852(d), or alternatively, that the treaty's “preparatory or auxiliary” exemption does not apply to sellers whose primary business activity in the U.S. is marketplace fulfillment.
3. Implement Withholding at the Marketplace Level. Using existing authority under IRC §1445 (FIRPTA), §3406 (backup withholding), and/or §1441/§1442 (withholding on foreign persons), require marketplace platforms to withhold a percentage of disbursements to foreign sellers and remit directly to the IRS. This ensures collection at the point of sale and eliminates the enforcement gap that currently allows foreign sellers to operate without filing U.S. tax returns.
4. Conduct a Comprehensive Investigation. Launch an audit program targeting foreign sellers using third-party fulfillment services to examine whether their activities constitute a USTB, focusing on inventory scale, sales volume, and platform dependency. Re-evaluate whether platforms acting as fulfillment providers could be characterized as dependent agents in certain cases.
5. Enforce Filing Requirements. Require foreign sellers meeting the above thresholds to file Form 1120-F or 1040-NR and impose penalties for non-compliance. Collaborate with state tax authorities to ensure nexus is asserted based on economic presence.
6. Coordinate with Congress if Needed. If the IRS determines that additional legislative authority is required to implement marketplace withholding or to explicitly override the 1987 treaty, provide specific recommendations to Congress for statutory changes — exercising the “later in time” principle under IRC §7852(d).

We believe these actions are not only within the IRS's existing authority — they are required by existing law. IRC §864 defines the standard. The TCJA strengthened it. Wayfair established the precedent. FIRPTA, §3406, and §1441 provide the collection mechanism. What is missing is the IRS's willingness to apply these tools to the largest category of untaxed foreign commerce in the United States.

We request a detailed response outlining the IRS's planned steps, including timelines for investigation and guidance issuance.

Thank you for your service and commitment to upholding the principles of equitable taxation.

Respectfully,

The American E-Commerce Business Alliance

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