Amazon.com represents an enormous opportunity for Australian businesses, with millions of customers shopping online, and potentially looking for your products. With the launch of Amazon.com.au in December, Australian businesses can start selling online in Australia, and then take their business global with the Amazon marketplace platform.
Entering the US market is a big step for any business – and there are several things to consider, including their complex banking, legal, tax and corporate rules. In this article we will take you through several of the most important factors that that you need to get right for your business to succeed in the US market.
Company formation – US or Australia
One of the most important things to consider before entering the US market is how your business will be structured. Will you be trading as an Australian company or business, or will you set up in the US directly?
An incorrect structure choice may mean that you pay more tax than necessary, plus it’s an ongoing compliance headache to manage. You should seek professional advice about which option is right for your business before deciding whether you need to set up a company in the US, as it can be costly to correct mistakes.
Setting up a US entity may give you a wider range of finance options, such as a US-based bank account, access to US merchant facilities, USD credit cards and potentially to Amazon Lending.
If you are setting up in the US directly, the two main US entity options are an LLC or a Corporation. An LLC is often more favourable from a tax compliance standpoint. Another consideration is the kind of physical or legal presence you have in the US, if any. The other consideration is how a US entity fits with your existing business structure, the wrong choice could mean you pay double tax.
Choosing the state in which to locate your business can also have a big impact on the costs of maintaining company registration. Registering in the state of Wyoming carries a fixed fee ranging from $50 to $250 annually. Contrast this with Delaware, a popular state for company formation among technology companies, where the fees can range from $400 up to a staggering $180,000. As Wray Rives, US tax expert with NeedaCPA.com puts it, “Delaware might be good if you’re starting the next Twitter, but for a closely held ecommerce company, there are better options.”
Company formation can have a significant impact on the taxation and compliance costs for your business. Make sure you understand which approach will be best for your business and ensure that your chosen structure does not expose you to unintended tax consequences.
US state and federal laws differ on what constitutes a legal or physical presence, and the landscape is changing fast.
Making an exact determination whether your business has a taxable presence in the US and the effect that has on your business structure and taxation depends on the nature of your business in the US. For example if you had an employee in the US (e.g. a sales rep) this would almost certainly affect your tax status. Discussing your plans with a US tax adviser can help to avoid triggering an unintended tax liability.
The good news: “it can actually be a good thing” to be officially operating in the US, Wray tells us. The US corporate rate in 2018 will drop to 21% and the effective rate can be even lower, once various exemptions are taken into account.
US state sales tax
When Amazon’s FBA service was first launched c. 2007 the consensus was that businesses using FBA as a third-party warehouse service wouldn’t incur sales tax obligations in US states except in their ‘home’ states, and in states where they were explicitly registered to do business.
In recent years, many US states have changed their rules, and for e-commerce businesses, having stock in a US warehouse generally triggers the need to register the business in that state. For Amazon sellers using FBA in the USA, that can mean a sales tax obligation in 25 or more US states.
For FBA sellers, registration in the state of California will likely be top of the list – California has FBA warehouses, and the state represents the largest market for most sellers. Other important states to consider for business/tax registration are Texas, Pennsylvania, Florida and Illinois.
Late in 2017 it was announced that Amazon had agreed to collect and remit sales tax on behalf of sellers in its home state of Washington. For many Amazon-only sellers this creates the opportunity to de-register in Washington. It remains to be seen whether similar agreements will be implemented in other US states. For the moment the obligation remains, and the change in sales tax status will almost certainly not relieve you of historical sales tax obligations.
While this isn’t an exhaustive list of considerations, it can form the beginnings of your planning and researching phase before you enter the US market. It’s best to seek expert advice from the get go. Getting it wrong can be costly and almost impossible to correct once you’re making sales in the US.
US banking and bank accounts
The whole point of expanding to the US is to earn revenue from American shoppers, so you’ll need a bank account to receive those US dollars and keep them safe. While it’s possible to have Amazon convert the USD and pay directly to an Australian bank account, it’s not always the best approach.
Jason Macdonald of White & Black, international tax specialist suggests “It can make sense to look at using a US dollar denominated bank account to manage your FX exposure and reduce exchange costs – particularly if you are purchasing inventory in US dollars”. You can also use a 3rd party service to provide a virtual US dollar bank account such as WorldFirst or OFX. Using your own bank account, or virtual account gives you control over when you convert the funds and lets you avoid Amazon’s sometimes unfavourable exchange rates.
Trading through a US entity makes it easier to open US bank account, which would give you access to US-based merchant account facilities, and potentially reduced credit card processing costs for USD transactions.
If you are considering this route, take care when choosing how to open a US bank account, especially when selecting an off-the-shelf service. Wray Rives, US tax expert with NeedaCPA.com, says many of these services will delegate the legally-required US officer duties to a US resident, which means your company suddenly has a legal business presence in the US. This triggers a variety of tax implications. Federal law also requires that banks ‘know the customer’, which might mean you’d need to appear in person, with identification, to open an account.
Rives warns against one-size-fits-all services, which can cut corners in the process, impacting on your business structure and tax compliance. It’s important you research and understand what any new banking service is going to do. Rives suggests the best approach is to go to the US and open your bank account in person.
When deciding how you are going to be paid, examples such as: an Australian bank account receiving converted USD, to a virtual account receiving USD directly, or even an actual US bank account – make sure you understand the implications and costs of your banking solution.
About the Contributors
Wray Rives, NeedaCPA.com
Wray is a CPA and CGMA, with over 30 years of experience in accountancy and tax advice. Wray’s firm NeedaCPA.com operates 100% online, with over 50% of its clients based outside the US. Wray has deep experience handling the US expansion of international companies and helping to navigate the complex tax and corporate environment, he’s a highly rated contributor on Quora specializing in tax advice. Wray serves clients on Quickbooks Online.
Jason Macdonald, White & Black
Jason is the founder at White & Black and has over 15 years of experience in accountancy and international tax. White & Black provides a complete accounting and tax solution for Australian Amazon sellers looking to grow their business profitably in Australia and overseas markets. White & Black also assists international Amazon sellers looking to expand into the Australian marketplace by managing their tax and regulatory compliance. White & Black is a ProAdvisor for Quickbooks Online.