The Law Already Exists. It Just Isn't Being Applied.
Under IRC §864(b) and §875, substantial U.S. activity — including operating through American warehouses — can already establish a U.S. Trade or Business, triggering Effectively Connected Income at full U.S. rates. No treaty amendment may even be required. The existing law, properly applied, is sufficient.
IRC §864(b): What It Says
Defines “trade or business within the United States” for tax purposes. Under the case law interpreting this section — notably Pinchot v. Commissioner, Lewenhaupt v. Commissioner, and InverWorld, Ltd. v. Commissioner — a foreign person is engaged in a U.S. trade or business when they conduct substantial, continuous, and regular business activity in the United States.
Inventory stored in U.S. warehouses
Order fulfillment from U.S. soil
Shipping to U.S. consumers
Customer service for U.S. customers
All of these activities are performed daily by foreign marketplace sellers using Amazon FBA, Walmart Fulfillment Services, and similar programs.
Source: Cornell LII — 26 CFR §1.864-2
Source: Bloomberg Tax — IRC §864
The TCJA Strengthened This
The Tax Cuts and Jobs Act of 2017 (P.L. 115-97) strengthened U.S. taxing jurisdiction over foreign business activity through two specific amendments to the international tax framework. These changes reflect a clear congressional intent to tax economic participation in the U.S. market.
Income Sourcing for Inventory Sales
Amended so income from inventory sales is sourced solely to the location of production activities — replacing the prior 50/50 sourcing rule and tightening rules on where income is considered earned.
Partnership Interest Dispositions
Added to treat gain or loss on a foreign person's sale of a partnership interest in a U.S. trade or business as effectively connected income.
Expanded U.S. Taxing Jurisdiction
Taken together, these amendments reflect a clear congressional intent to expand U.S. taxing jurisdiction over foreign business activity connected to the American market.
Why It’s Not Being Enforced
The law exists. The enforcement doesn’t. Here’s why.
No IRS Guidance
The IRS has not issued definitive guidance on whether FBA-style marketplace fulfillment constitutes a U.S. Trade or Business.
Treaty Override Default
Tax professionals rely on the treaty PE exemption instead of analyzing whether §864 independently establishes a trade or business.
Seller Default Behavior
Without clear IRS guidance, foreign sellers default to claiming no U.S. tax obligation. There is no penalty for doing so.
Zero Enforcement
IRS enforcement against foreign marketplace sellers is functionally nonexistent. No audits. No penalties. No compliance checks.
Effectively Connected Income
If a foreign seller is found to have a U.S. Trade or Business, their income becomes “Effectively Connected Income” (ECI) under IRC §871/§882.
37%
Maximum U.S. federal income tax rate applied to ECI
Same rate as domestic businesses
Required Filing
- Form 1120-F — Foreign corporations
- Form 1040-NR — Nonresident individuals
This is EXISTING LAW
ECI taxation is not a new proposal. It is existing U.S. tax law that applies to every foreign person with a U.S. trade or business. The only question is whether the IRS will apply it to the modern reality of marketplace commerce.
What AEBA Is Asking For
IRC §864 and the TCJA are the primary legal basis for taxing foreign marketplace sellers. These sellers claim the 1987 treaty shields them — but domestic law enacted thirty years later supersedes the treaty under IRC §7852(d). The IRS does not need new legislation. It does not need to renegotiate the treaty. It needs to apply the law that already exists and implement marketplace withholding using FIRPTA (§1445), backup withholding (§3406), or §1441/§1442 to collect it.
The Complete Framework
IRC §864 / TCJA
Existing domestic law — foreign marketplace sellers already have a U.S. Trade or Business
Later-in-Time Authority via §7852(d)
Under the 'later in time' rule, Congress retains the authority to apply later-enacted domestic law — such as the TCJA, enacted more than three decades after the 1987 treaty — where it conflicts with earlier treaty provisions
Marketplace Withholding
Collect via FIRPTA (§1445), backup withholding (§3406), or §1441/§1442 — infrastructure already in place
No new legislation required. Administrative guidance applying existing law to modern reality.