The Domestic Law That Overrides the W-8 Claim
A foreign seller signs Form W-8BEN to assert two things: that it has no U.S. trade or business, and that the 1987 tax treaty shelters it. Existing domestic law answers both. IRC §864(b) establishes the U.S. trade or business and the effectively connected income; the Tax Cuts and Jobs Act reinforced the sourcing rules that keep that income taxable here; and IRC §7852(d) confirms that a later-enacted statute is not subordinate to an earlier treaty.
The Two Assertions on Form W-8BEN
A foreign marketplace seller certifies its status to the platform on Form W-8BEN or W-8BEN-E. The certification rests on two propositions: that the seller’s income is not effectively connected with a U.S. trade or business, and, in the alternative, that the U.S.–China treaty removes any liability. Both are questions of law, and existing domestic statutes decide them. That mechanism — the form, its certification, and the case law — is set out in the companion page, The W-8 Loophole. This page addresses the statutes that override the claim.
Assertion 1
“My income is not effectively connected with the conduct of a trade or business in the United States.” Answered by IRC §864(b).
Assertion 2
“Even if I do, the 1987 treaty shelters me.” Answered by IRC §7852(d) and the later-in-time rule, and by the treaty’s own terms.
IRC §864(b): The Trade or Business and the Income
IRC §864(b) defines a “trade or business within the United States.” The case law interpreting it — Lewenhaupt v. Commissioner, Adda v. Commissioner, and Ya Global Investments v. Commissioner — holds that a foreign person is engaged in a U.S. trade or business when activity that is considerable, continuous, and regular is carried on in the United States on its behalf, whether directly or through an agent, and without regard to the owner’s physical presence. Adda (1948) and Lewenhaupt (1953) predate the Tax Cuts and Jobs Act and interpret a provision the Act did not change; a decision construing a statute still in force remains good law, and Ya Global (2023) applied the same rule after the Act. The exact statutory text is quoted in full below, under “The Law First, Then the Determination.”
A foreign marketplace seller performs exactly that activity through its U.S. fulfillment operation:
Inventory held in U.S. fulfillment centers
Orders picked, packed, and shipped from U.S. soil
Payment collected and processed on U.S. sales
Customer service, returns, and refunds for U.S. buyers
Once a U.S. trade or business exists, §864(c)(3) treats substantially all of the seller’s U.S.-source business income as effectively connected income. It is then taxed at graduated rates under §882 (foreign corporations, on Form 1120-F) or §871(b) (nonresident individuals, on Form 1040-NR) — the same rates a domestic competitor pays. Assertion 1 fails on the statute alone, without reference to any treaty.
The Tax Cuts and Jobs Act Reinforced U.S. Taxing Jurisdiction
The controlling sourcing rule here — §865(e)(2), below — is longstanding and predates the Act. What the Tax Cuts and Jobs Act of 2017 (P.L. 115-97) added were the two amendments that reinforce it: it tightened inventory sourcing under §863(b) and, in §864(c)(8), closed a related route out of the U.S. net. Together they answer the fallback argument that a foreign producer’s sale income is foreign-source and therefore beyond U.S. tax.
The U.S.-office source rule (longstanding, and controlling)
This rule predates the Act and does most of the work. Income from a nonresident's sale of personal property is sourced to the United States when it is attributable to an office or other fixed place of business the nonresident maintains here, unless the goods are sold for use abroad through a materially participating foreign office. Goods sold to U.S. consumers from U.S. fulfillment centers are U.S.-source.
Inventory-sale sourcing tightened
The Tax Cuts and Jobs Act amended §863(b) so that income from the sale of produced inventory is sourced by reference to production activities, removing the prior 50/50 method that let sellers assign a portion of U.S. sales income to a foreign point of title passage.
Effectively connected gain expanded
The Act added §864(c)(8), treating a foreign person's gain on the disposition of an interest in a partnership engaged in a U.S. trade or business as effectively connected income, closing a route that had been used to strip such gain out of the U.S. net.
Read together, these provisions keep the seller’s income within the U.S. net. Where a seller maintains inventory and fulfills sales through a U.S. fixed place of business, §865(e)(2) sources that sale income to the United States, and §864(c) makes it effectively connected. The foreign-source argument does not survive contact with the current sourcing rules.
IRC §7852(d): The Treaty Does Not Sit Above the Statute
Assertion 2 treats the 1987 treaty as a superior authority that displaces the Code. It is not. IRC §7852(d) provides that, in determining the relationship between a treaty provision and a U.S. law affecting revenue, neither has preferential status by reason of being a treaty or a law. They stand on equal footing, and under the long-settled later-in-time rule, the one enacted later controls where the two conflict.
The U.S.–China treaty entered into force in 1987. The Tax Cuts and Jobs Act was enacted in 2017, thirty years later, and reflects a considered congressional judgment about taxing foreign economic participation in the U.S. market. A seller cannot invoke the earlier treaty to defeat the later statute.
In any event the treaty does not shelter a full fulfillment operation on its own terms: the Article 5(4) storage exemption applies only to a facility used solely for storage on a preparatory or auxiliary basis, and the Protocol’s anti-treaty-shopping rule denies benefits to sellers operating through offshore holding structures. That analysis is set out in The W-8 Loophole and The 1987 Treaty.
The Law First, Then the Determination
Every conclusion on this page is anchored to a specific provision of the Internal Revenue Code. Each operative provision is quoted in full below, exactly as enacted: this is the exact text of the law. Under each, in plain terms, is the determination AEBA draws from it when that text is applied to a foreign seller that fulfills U.S. orders from U.S. inventory. The quoted language is the statute; the determination is the inference. Congress did not write a provision that names marketplace sellers, and most of these provisions predate the Tax Cuts and Jobs Act, which reinforced the sourcing and jurisdiction rules around them.
For purposes of this part, part II, and chapter 3, the term “trade or business within the United States” includes the performance of personal services within the United States at any time within the taxable year, but does not include— [statutory safe harbors follow].
What we determine from it
The statute names the term but defines it largely by exception. The operative “considerable, continuous, and regular” standard comes from the Treasury regulation, 26 C.F.R. §1.864-2, and the case law — Lewenhaupt (1953) and Adda (1948), which predate the Act, and Ya Global (2023), which applied the same rule after it. A seller running a continuous U.S. fulfillment operation meets that standard and is engaged in a U.S. trade or business.
Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business shall be sourced in the United States.
What we determine from it
A seller that holds inventory in, and fulfills sales through, U.S. fulfillment centers is selling personal property attributable to a U.S. fixed place of business. Its sale income is U.S.-source. Whether the fulfillment operation is the seller’s “fixed place of business” is the contested fact this turns on.
All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.
What we determine from it
Once the seller has a U.S. trade or business, its U.S.-source sale income is effectively connected income by operation of the statute. No separate showing is required transaction by transaction.
A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11, 55, or 59A, on its taxable income which is effectively connected with the conduct of a trade or business within the United States.
What we determine from it
The seller’s effectively connected income is taxed at the same graduated rates a domestic competitor pays, and is reported on Form 1120-F (a foreign corporation) or Form 1040-NR (a nonresident individual).
For purposes of determining the relationship between a provision of a treaty and any law of the United States affecting revenue, neither the treaty nor the law shall have preferential status by reason of its being a treaty or law.
What we determine from it
The 1987 treaty does not sit above the Code. The two stand on equal footing, and the later-enacted statute controls a conflict. The treaty is a shelter to be tested, not a superior authority that ends the inquiry.
The statutory text is fixed; its application is the argument. The pivotal facts are whether the fulfillment operation is the seller’s “fixed place of business” under §865(e)(2) and whether its activity is “considerable, continuous, and regular” under 26 C.F.R. §1.864-2 and the case law. For a full fulfillment operation both are met; whether they are met for a given seller is a facts-and-circumstances determination.
Source: 26 U.S.C. §865 (Cornell LII)
Source: 26 U.S.C. §864 (Cornell LII)
Source: 26 U.S.C. §882 (Cornell LII)
Source: 26 U.S.C. §7852 (Cornell LII)
Collection Requires No New Statute
Because the income is taxable under existing law, the remaining question is administrative: how to collect it. The infrastructure already exists. The correct withholding certificate for a seller with effectively connected income is Form W-8ECI, and marketplace-level withholding on disbursements to foreign sellers can be implemented by adapting frameworks the platforms already operate.
Withholding on dispositions by foreign persons, the model for point-of-payment collection.
The existing mechanism for withholding where payee reporting is deficient.
The standard regime for withholding on payments to foreign persons and corporations.
Marketplaces already collect state sales tax at the point of sale following South Dakota v. Wayfair. The same operational capacity can withhold on foreign-seller income. No new legislation is required; what is required is guidance applying the existing law and directing the collection.
Why the Law Is Not Yet Applied
The gap is one of enforcement, not authority. The Internal Revenue Service has issued no guidance stating that marketplace fulfillment constitutes a U.S. trade or business; preparers default to the treaty permanent-establishment analysis rather than the domestic trade-or-business analysis; and, absent guidance or audits, foreign sellers default to the non-filing position at no cost. AEBA’s Open Letter to the IRS sets out the guidance and the collection mechanism the Service could adopt under existing law.