The Treaty Written Before the Internet Existed
The US-China Income Tax Treaty defines permanent establishment using concepts from 1984 — before e-commerce, before Amazon, before digital marketplaces. Its exemptions are now the foundation of a $220B+ tax loophole.
What the Treaty Says
Article 5 defines Permanent Establishment (PE) as “a fixed place of business.” But Article 5(4) excludes facilities used solely for “storage, display, or delivery” of goods. This was written for physical warehouses serving physical stores.
Amazon FBA warehouses are classified as “storage for delivery” — so foreign sellers using FBA have no PE and owe $0 U.S. income tax.
Key Treaty Language
“The term 'permanent establishment' shall not be deemed to include… the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or delivery.”
— U.S.-China Income Tax Treaty, Article 5(4)(a)
Why It Made Sense in 1984
The treaty’s intent was to prevent double taxation. If a Chinese company stored goods in a U.S. warehouse to supply a U.S. retailer, they shouldn’t be taxed twice. The assumption: they’d pay tax in China.
The commercial internet didn’t exist. Amazon wasn’t founded until 1994. E-commerce didn’t exist as a concept.
1984
Treaty signed
No internet, no e-commerce, no digital marketplaces
1994
Amazon founded
Ten years after the treaty was negotiated
2025
Today
$220B+ in foreign seller revenue across U.S. marketplaces
Why It’s Broken Now
In 2025, a Chinese seller can: manufacture in China, ship to Amazon FBA, sell directly to American consumers, generate millions in U.S. revenue — and owe $0 in U.S. federal income tax.
Manufacture products in China
Ship inventory to Amazon FBA warehouses in the United States
Sell directly to American consumers on Amazon, Walmart, Temu
Generate millions in U.S. revenue annually
Pay $0 in U.S. federal income tax
The treaty’s “storage for delivery” exemption was never designed for this. The seller has no U.S. office, no employees, no agents — just inventory in Amazon’s warehouse. Under the treaty, that’s not enough.
They’re Not Even Paying at Home
The treaty assumed sellers would pay tax in China. Bloomberg revealed in November 2025 that they weren’t. China ordered Amazon to hand over data. 780+ sellers fled to Hong Kong in one month.
The treaty’s fundamental premise — that income would be taxed in the seller’s home country — was a fiction. These sellers pay zero tax in the U.S. and zero tax in China. The income disappears entirely.
780+
Chinese sellers switched Amazon registrations to Hong Kong in a single month to evade China’s tax reporting requirements
$0
Total U.S. AND Chinese income tax paid by sellers exploiting the treaty gap — zero on both sides
Source: Bloomberg, Nov 2025
Source: Marketplace Pulse
What AEBA Is Asking For
Foreign sellers currently rely on the 1987 treaty’s Article 5(4) exemption to claim they owe no U.S. taxes. That claim does not hold up under existing domestic law. Under IRC §864(b), these sellers already have a U.S. Trade or Business. The Tax Cuts and Jobs Act of 2017 strengthened this standard. And under the “later in time” rule (IRC §7852(d)), domestic law enacted thirty years after the treaty supersedes it.
The treaty is not the barrier it appears to be. It is a shield that has never been tested — because the IRS has never applied the domestic law that overrides it. AEBA’s position is clear: the IRS should apply IRC §864 and the TCJA to foreign marketplace sellers, and implement mandatory withholding at the marketplace level using established mechanisms under FIRPTA (§1445), backup withholding (§3406), or §1441/§1442.
AEBA also fully supports the SAFE Act introduced by Senator Cassidy, which requires verifiable importers of record — closing the identity gap that makes enforcement possible. The SAFE Act identifies them. Existing domestic law taxes them. Withholding collects it.
The Standard
$500,000+ in annual U.S. marketplace sales or 200+ separate transactions establishes a U.S. Trade or Business under IRC §864 for foreign sellers.
The Mechanism
Apply IRC §864 and the TCJA. The “later in time” rule (§7852(d)) overrides the treaty. Collect via marketplace withholding under FIRPTA, §3406, or §1441 — using infrastructure already in place for sales tax.