Foreign Marketplace Sellers Owe U.S. Income Tax. Most Do Not Pay It.
A foreign seller that holds inventory in U.S. fulfillment centers and sells continuously to U.S. customers is engaged in a United States trade or business, and its profits are taxable here. By certifying otherwise on Form W-8BEN, sellers avoid the return and the tax that existing law requires. The resulting shortfall is an estimated nine to sixty billion dollars a year.
Summary of the Analysis
A nonresident individual or foreign corporation that carries on a continuous commercial business in the United States, whether directly or through an agent acting on its behalf, is engaged in a “trade or business within the United States” under Internal Revenue Code §864(b). Its profits from that business are effectively connected income (ECI), taxable at graduated U.S. rates and reportable on Form 1120-F (corporations) or Form 1040-NR (individuals).
A foreign seller that stores inventory in U.S. fulfillment centers and sells to U.S. customers on a continuous basis satisfies that standard. It nonetheless certifies, on Form W-8BEN or W-8BEN-E, that its income is “not effectively connected with the conduct of a trade or business in the United States” — the certification that belongs on the opposite form, Form W-8ECI, which requires a U.S. return. The practical result is that an estimated $220 billion in annual U.S. marketplace sales by foreign sellers produces little or no U.S. income tax, while domestic competitors on the same platforms bear combined rates as high as 50.3 percent.
$220B+
Estimated annual U.S. marketplace sales by foreign sellers
$9–$60B
Estimated annual federal and state income tax not collected on that income
50.3%
Top combined rate a U.S. competitor pays on the same sales
The Governing Standard: A U.S. Trade or Business Conducted Through an Agent
The threshold question is not whether the income is effectively connected. Once a U.S. trade or business exists, §864(c) treats substantially all of the taxpayer’s U.S.-source business income as effectively connected. The question is whether the foreign seller is engaged in a U.S. trade or business at all. The courts have decided a materially identical question for more than eighty years, and the result does not turn on the taxpayer’s physical presence. What controls is whether activity that is considerable, continuous, and regular is carried on in the United States on the taxpayer’s behalf.
A foreign fund was engaged in a U.S. trade or business, with effectively connected income, because its U.S.-based manager conducted continuous and regular business activity on the fund's behalf.
The controlling modern authority. A foreign principal is taxable on the U.S. business its U.S. agent conducts for it. That is the Amazon fulfillment relationship.
Foreign nationals who regularly bought and resold U.S. goods through a U.S. representative were engaged in a U.S. trade or business and were taxable in the United States.
A sale-of-goods case, not passive investment. Regular, continuous dealing in goods through a U.S. presence is a U.S. trade or business.
A foreign owner who never entered the United States was engaged in a U.S. trade or business because U.S. agents carried on the business continuously on his behalf.
Physical presence of the owner is irrelevant. What matters is the continuous U.S. activity conducted for the owner, which is precisely the seller who never leaves China.
A foreign company whose production occurred entirely offshore was engaged in a U.S. trade or business because it regularly sold through a U.S. agent.
Directly on point: manufacture abroad, sell continuously through a U.S. channel, and the enterprise is doing business in the United States.
A nonresident whose U.S. agent regularly transacted on his behalf was engaged in a U.S. trade or business.
The foundational attribution rule: the agent's continuous U.S. activity is the foreign principal's own.
Continuous, active management of U.S. assets through an agent constituted a U.S. trade or business.
Confirms that the continuity and scope of the U.S. activity, not the owner's location, determine the result.
The Fulfillment Network Operates the Seller’s United States Business
The fulfillment relationship is not passive warehousing. On the seller’s behalf, and on U.S. soil, the marketplace and its logistics network carry out the day-to-day conduct of the seller’s business:
- •Receives and stores the seller's inventory in U.S. fulfillment centers
- •Picks, packs, and ships each individual U.S. customer order
- •Collects and processes payment on the seller's sales
- •Administers customer service, returns, and refunds for U.S. buyers
- •Provides the pricing, advertising, and inventory tools through which the seller runs a continuous, high-volume U.S. storefront
These functions are the ordinary operations of a sales business, performed continuously inside the United States for the foreign owner. Under the authorities set out above — Ya Global, Lewenhaupt, Adda, and Balanovski — activity of this character, carried on for the account of the foreign owner, is the owner’s own U.S. trade or business, whether the owner performs it directly or through an agent.
The seller directs the enterprise. It selects the products, sets the prices, funds the advertising, and decides how much inventory to place in which U.S. warehouse. A U.S.-based apparatus executes that business every day. That is a United States trade or business, and the profit it produces is effectively connected income taxable under §882.
Permanent Establishment Under the U.S.–China Treaty
The domestic trade-or-business analysis is sufficient on its own; the treaty is relevant only if a seller qualifies to invoke it and can show it has no permanent establishment. Neither condition holds for a full fulfillment operation.
The storage exemption does not apply.
Article 5(4) of the treaty excludes a fixed place used solely for “storage, display or delivery” on a “preparatory or auxiliary” basis. A fulfillment center is not used solely to store the seller’s goods; it holds the standing stock from which the seller’s U.S. sales are continuously filled. When the maintenance of inventory is integral to concluding and completing sales, rather than incidental to a sales function performed elsewhere, the exemption is unavailable and the general rule of Article 5(1) governs.
Many sellers cannot claim the treaty at all.
The 1987 treaty’s Protocol 2 contains an anti-treaty-shopping limitation. A seller that operates through a Hong Kong, BVI, or other offshore holding company frequently fails to qualify as a Chinese treaty resident, which forecloses the permanent-establishment argument before it is reached.
Where a permanent establishment exists, Article 7 permits the United States to tax the business profits attributable to it. The treaty narrows the base; it does not eliminate the liability.
The Domestic Law That Overrides the Claim: §864 and the TCJA
Form W-8BEN asserts two escapes: that the seller has no U.S. trade or business, and that the 1987 tax treaty shelters it. Existing domestic law answers both. The full statutory analysis is set out in the companion page, IRC §864 and the TCJA.
Defeats the no-income claim
The fulfillment operation is a U.S. trade or business, and §864(c) then treats the seller's U.S.-source business income as effectively connected. No treaty is required to reach this result; the domestic statute reaches it directly.
Keeps the income U.S.-source
A seller may argue the sale income is foreign-source and untaxed. §865(e)(2) sources a nonresident's sale of goods to the United States when it is attributable to a U.S. fixed place of business, and the Tax Cuts and Jobs Act removed the former 50/50 method in §863(b). The income remains U.S.-source, and effectively connected.
The treaty does not sit above the statute
A statute and a treaty carry equal authority, and a later-enacted statute controls over an earlier treaty where the two conflict. The Tax Cuts and Jobs Act postdates the 1987 treaty by three decades. The treaty is a potential shelter, not a superior law.
The result is that the seller’s two assertions fail on domestic law alone. The tax is owed whether or not the treaty is reached, and the treaty, when reached, does not shelter a full fulfillment operation. See IRC §864 and the TCJA and the Wayfair principle.
How the Liability Is Avoided: Form W-8BEN
At onboarding, a foreign seller certifies its status to the marketplace on Form W-8BEN (individuals) or Form W-8BEN-E (entities). The certification, made under penalties of perjury, states that the income is:
“(a) income not effectively connected with the conduct of a trade or business in the United States; (b) income effectively connected … but is not subject to tax under an applicable income tax treaty …”
— Form W-8BEN, Part III Certification (Rev. Oct. 2021)
The correct instrument for a seller with effectively connected income is Form W-8ECI. Its cover page directs any person “claiming that income is effectively connected with the conduct of trade or business within the United States” to use it rather than W-8BEN, and it carries the instruction that the filer “must file an annual U.S. income tax return.” The two forms are mutually exclusive; selecting W-8BEN is a representation that no U.S. return is due.
Because proceeds from the sale of goods are not a category of payment subject to U.S. withholding, a valid W-8BEN allows the marketplace to remit the full proceeds, withhold nothing, and file no Form 1099-K or 1042-S reporting the seller to the Internal Revenue Service. The income is therefore neither taxed nor reported. The selection of one form over the other is the operative act that removes an otherwise taxable U.S. business from the system.
Source: IRS Form W-8BEN (Rev. 10-2021)
Source: IRS Form W-8ECI (Rev. 10-2021)
The Independent-Agent Objection, and Why It Does Not Hold
The principal defense is that the marketplace is an independent agent serving many merchants, so its activity should not be attributed to any one seller. The argument is answered by the statute and by the facts. No court has yet decided the question for a fulfillment seller; the analysis rests on the settled authorities applied to the seller’s own conduct.
The objection. The seller will argue that Amazon is an independent agent serving millions of unrelated merchants in its own ordinary course of business, so its activity does not create a trade or business or a permanent establishment for any one seller.
The answer. The statutory independent-agent safe harbor in IRC §864(b)(2) is limited by its terms to trading in stocks, securities, and commodities. It does not shelter a seller of goods. And the treaty version of the argument fails on the facts: the seller itself directs the enterprise — it sources the product, sets the price, funds the advertising, and decides inventory placement — while contracting out only the mechanics of fulfillment. The business being carried on in the United States is the seller's own.
The objection. The seller will argue that use of a U.S. agent for purely ministerial tasks is not enough to create a trade or business.
The answer. Correct, and inapposite. Pinchot involved passive rent collection with no discretion. Fulfillment by a marketplace is active and continuous: receiving inventory, filling thousands of individual orders, processing payments and returns, and running an advertised, priced storefront aimed at U.S. buyers. That is far past the ministerial line.
The objection. The seller will cite authority that a foreign manufacturer selling into the U.S. only through an order-taking representative — with no U.S. inventory — is not engaged in a U.S. trade or business.
The answer. That describes a fundamentally different arrangement. The foreign marketplace seller maintains a standing stock of goods on U.S. soil and fills U.S. orders from it continuously. Inventory physically present in the country, from which sales are made, is the distinguishing fact these authorities lacked.
The Revenue at Stake
Foreign sellers generate an estimated $220 billion or more in annual U.S. marketplace sales. Applying ordinary federal and state income tax to the profits on that volume yields an estimated $9 billion to $60 billion of revenue that is not being collected. The income is earned in the United States, from U.S. customers, using inventory on U.S. soil, and it is taxable under existing law.
The loss is compounded on enforcement. Under Swallows Holding and §882(c)(2), a foreign corporation that files no timely return forfeits its deductions and is taxed on gross receipts. The liability that non-compliance ultimately creates is therefore larger than the tax that timely filing would have produced.
The same gap operates as a subsidy against domestic sellers. A U.S. company on the identical platform pays combined federal and state rates as high as 50.3 percent; the foreign competitor selling beside it pays nothing. The result is not a neutral loss to the Treasury. It is a government-created cost advantage handed to foreign sellers inside the U.S. market.
The Consequences of Non-Compliance
A foreign corporation that does not file a timely Form 1120-F forfeits all deductions and credits against its effectively connected income and is taxed on gross receipts under IRC §882(c)(2).
A seller that files Form W-8BEN and no return, and is later determined to have effectively connected income, faces tax on gross U.S. sales — no cost of goods, advertising, or platform fees deducted. The exposure is larger than the tax that timely compliance would have produced.
A foreign corporation's U.S.-source income was effectively connected, and late-filed protective returns did not restore the deductions forfeited by untimely filing.
Confirms the Swallows Holding rule in the current era and shows the deduction forfeiture is enforced, not theoretical.
A conviction for making or assisting a false tax document under IRC §7206 is an aggravated felony for immigration purposes.
A false certification signed under penalties of perjury carries consequences beyond assessment. For a noncitizen, exposure includes removal.
The Advice Foreign Sellers Receive, and the Duty of Return Preparers
The non-filing position is not one sellers reach unaided. Tax and accounting firms in both China and the United States publish it. The recurring defect is the substitution of the treaty permanent-establishment inquiry for the domestic trade-or-business inquiry — two separate tests, the domestic one answered first.
“If all you do is advertise your products online and deliver them … to one of Amazon's warehouses in the U.S. … you would not be engaged in a USTB, and thus not subject to taxation.”
A categorical no-liability conclusion from a named firm, published without the fact-specific analysis the position requires. The same firm later restated it as “no single fact produces an automatic answer” (2026).
“In most standard FBA arrangements where the foreign owner is hands-off … it is generally concluded that the foreign owner is not engaged in a USTB.”
Presents no U.S. trade or business as the default outcome, without addressing the continuous-activity authorities above.
“Chinese sellers shipping via FBA are unlikely to constitute a PE, and therefore do not need to pay U.S. income tax. (使用FBA仓储发货的中国卖家，大概率不会构成PE，也就不用缴美国所得税。)”
Resolves a domestic trade-or-business question with a treaty permanent-establishment conclusion. They are separate tests, and the domestic question is answered first.
“Importing treaty logic into the domestic test. The dependent-agent concept belongs to the PE analysis, not the USTOB analysis. When a professional says 'Amazon is an independent contractor, so you … don't have USTOB,' they are applying the wrong test.”
The core defect in the non-filing advice: it substitutes the treaty permanent-establishment inquiry for the domestic trade-or-business inquiry.
A preparer who recommends the non-filing position without a fact-specific analysis assumes professional and statutory exposure that runs to the preparer, not only the client:
AICPA Standards on Tax Services
A member may not recommend a return position that fails the applicable authority standard (realistic possibility of success, or reasonable basis with disclosure). A recommendation to file nothing, and disclose nothing, is unavailable where the facts indicate effectively connected income.
Circular 230, §10.34 and §10.51
A practitioner must make reasonable inquiries when the client's facts are inconsistent with the position, and may not counsel a client to violate the tax law. Sanctions extend to censure, suspension, and disbarment.
IRC §6700 and §6701
A firm that advises a class of similarly situated foreign sellers into an unsupported non-filing position is exposed under §6700 to a penalty of fifty percent of the gross income derived from the activity, and under §6701 to $10,000 per corporate document.
IRC §6694 and §7206(2)
The unreasonable-position preparer penalty is the greater of $1,000 or fifty percent of the fee. Willfully advising a false document is a felony under §7206(2).
Recommendation
No new statute is required. The authorities that make this income taxable already exist; what is missing is their application. AEBA recommends the following.
The Internal Revenue Service should issue guidance stating that a foreign seller exceeding a defined U.S. sales threshold, and holding inventory in U.S. fulfillment centers, is engaged in a U.S. trade or business under §864(b) and earns effectively connected income.
Marketplaces should be directed to require Form W-8ECI, rather than Form W-8BEN, from high-volume foreign sellers whose facts indicate a U.S. trade or business, and to apply withholding on their disbursements under existing authority.
Foreign sellers with effectively connected income should file Form 1120-F or Form 1040-NR; where the determination is genuinely uncertain, they should file a protective Form 1120-F to preserve deductions rather than file nothing.
Return preparers should perform and document a §864(b) analysis on each engagement, select the correct withholding certificate, and disclose uncertain positions, consistent with Circular 230 and the AICPA standards.
Source: AEBA — Open Letter to the IRS