If you are a Canadian and running an e-commerce business in the U.S., you are subject to pay different taxes depending upon your activity in the U.S.
Mohammad Akif, a cross-border CPA with over 15 years of experience, was called to answer all the tax questions surrounding Amazon Canadian sellers in the U.S. In addition to Amazon sellers, these questions may also apply to Canadian Etsy, Shopify, eBay, and other e-commerce platforms.
What Should We Do as an Amazon Seller Who Wants to Sell in the U.S.?Â
When you are ready to sell on Amazon.com and have a corporation in Canada, you must apply for a wholesale account, which calls for a reseller certificate, an EIN, and other documentation. People now desire to create an LLC because it makes things simpler.
Many Amazon sellers receive guidance regarding starting an LLC or merely creating an account in the US from many sources. However, for Canadians, an LLC is a bad idea.
Read More: Canadian Ecommerce Tax Guide – If You Sell in the U.S.
Should Amazon Sellers Open an LLC in the U.S.?
No, you should not incorporate an LLC in the U.S. while selling in the US as a Canadian corporation or as an individual, LLCs are a bad idea for Canadians.
The IRS looks at the LLC technically in a disregarded way. This means that the LLC does not pay any tax.
All the taxes are paid by the owner, which could be a person, could be a company, could be a partnership. The owner pays taxes on the profit earned.
How Does the CRA (Canada Revenue Agency) Look at the LLC?
The IRS views the LLC as disregarded, however, the CRA views it as a corporation.
If you have LLC and are selling in the U.S., you must submit a 1040 NR form. You must pay taxes on all of your income. Dividends will be withdrawn from the account when the after-tax amount is withheld for CRA, which will result in double taxation.
Therefore, unless you register the firm as an LLC in the U.S. as well, an LLC is a bad choice.
Is it Better to Have a Corporation or Sole Proprietorship in the U.S. for a Canadian?
It’s better to work in the United States through a Canadian corporation because it will help you get a tax ID number and EIN from the IRS. You can open up bank accounts as well.Â
However, for a sole proprietorship in the U.S., there are lots of other forms that need to be filed. There are a lot of other complications and it varies from state to state.Â
How Can You Have a Permanent Establishment (PE) in the U.S. Working from a Canadian Firm?
While working for a Canadian firm, it is possible to have a PE (permanent establishment) in the U.S., however, this depends on a variety of criteria, including the presence of an agent.
PE can also be established if you sign a contract, and PE can also be formed if you have an office.
What is the Tax Implication as a Canadian Corporation after the Reseller Certificate and EIN?
On the American side, there are different rules. When you sell in the United States, you theoretically have ECI because it is effectively linked to revenue and has a permanent establishment (PE).Â
Whether you have one ECI, one ECI with no PE, no PE with one ECI, or no ECI at all, it will affect your taxes and the paperwork you need to file.
A foreign corporation form called the 1120-F must be filed if you have an ECI, and there is also a tax treaty between the U.S. and Canada under the tax process.
What’s a Tax Treaty?Â
The United States and Canada have a tax agreement if you are a Canadian corporation selling it in the U.S.
They receive benefits from the tax treaty that they can exploit and can boast to others that the revenue they received came from U.S. sources, but because of the tax treaty, they don’t have PE; instead, everything is only taxable and reportable in Canada.
What if I haven’t Filed an 1120-F Form?
It doesn’t matter how late you are, this form must be submitted. This liability is created and it’s a requirement for you to file it if you have ECI and you are selling in the U.S.
You can also e-file this form every year. You must file this form and get an EIN before the IRS reaches out to you.
If you follow the proper procedures, it helps you migrate to the U.S., and become a permanent resident in the future.
Can sole Proprietorship in Canada Sell in the U.S.?Â
Yes, sole proprietorships can sell in the U.S., but it’s better to form a Canadian corporation to sell in the U.S. as it’s easier to work across borders.
You will need a tax ID number, ITN, or social security number personally in the United States. You will need to file a lot of forms and it is a complicated process that takes a lot of time.
Is It Mandatory to Get a Reseller Certificate?
Yes, it is better to have it.
If you’re starting new and you’re trying to test products out, you don’t need to get a reseller certificate, and you can pay the sales tax on your product. If your product is a success, you can get a reseller certificate later on from only one state.Â
If I file a Sales Tax W-8 Form Amazon Requires Me to Sell Through it. Is that Enough?
Yes, if you are selling through amazon and following the requirements, you don’t have to worry about sales tax.
Moreover, If you are selling through eBay or other sites you need to see what form they require to be filed for taxes.Â
What is Nexus? What Are the Advantages or Disadvantages of Getting it?
Nexus is technically an economical connection within the state. Every state establishes a certain threshold that could be in terms of sales or could be in terms of the transaction.
You don’t have to pay any taxes until you cross this threshold in the particular state. When you cross this threshold then that means you are creating economic activity in the state, so you have to pay tax.
How Do I Apply for a Reseller Certificate?
Each state administers its own sales tax, which is why each state has its own procedures.
Generally, a driver’s license and a person with a social security number are required by the state if you have an office in the city of Texas, and are asking for a sales tax permit.
However, you can always opt for expert assistance as you go through the reseller certificate application procedure.
If a Canadian company is already established as a Corporation in Canada, Should We Establish It as a Corporation in the U.S. too?
Yes, if you want to pursue this, this can be done. It’s much easier to work from the U.S. as you will be a resident. The complication of LLC won’t apply here.
When is the Filing Period for Those Who Have an LLC or Corporation in the U.S.?Â
If you are a sole proprietor and you have an LLC then the filing deadline is December 31st.
On April 15, you can file the U.S. return. You can get an extension in the United States and you need to have a tax ID number to obtain it. However, you must remember that you have to file returns personally for an LLC. Â
Read More: Tax Forms and Deadline for Canadians Selling Products in the U.S.
What if I Have Already Opened an LLC in the U.S.? What Should I Do?
If you haven’t filed your returns, you can become a corporation at the state level for tax purposes. Otherwise, you will remain as an LLC.
You need to file a form for the LLC to be a sole proprietorship. This transition will only be applicable for tax purposes only.
The second thing that you can do is file your due returns and close down everything and start as a new corporation.
