According to the US-UK tax treaty - https://treas.gov/offices/tax-policy/library/uktreaty.pdf
Income that residents of the United Kingdom receive for personal services as independent contractors or self-employed individuals are subject to the provisions of Article 7 (Business Profits) of the treaty. Under that provision, business profits are exempt from U.S. income tax unless they have a permanent establishment in the United States. If they have a permanent establishment available in the United States, they are taxed on the income attributable to the permanent establishment.
Having clients in the US does not constitute the nexus unless you actually perform work in the US.
However the fact that you store your inventory in California - means that you have a permanent establishment available in the United States - and all your income should be reported on US tax return. As you are non-resident - you should use the form 1040NR - http://www.irs.gov/pub/irs-pdf/f1040nr.pdf
In additional - as you have a nexus (permanent establishment) in California - you are required to register your business in this state, charge and remit sales tax from sates shipped to addresses in California.
You may find more information in this publication - Sales and Use Tax Questions for the Business Person - http://www.boe.ca.gov/pdf/pub53b.pdf
Let me know if you need any help.
As long as inventory is owned by you - you do maintain a permanent establishment.
The fact that you hire an agent to act on your behalf - doesn't change the situation.
The only difference would be - if the inventory is owned by the company or by the agent - in this case that company would have all tax liabilities mentioned above.
As you do own an inventory and do have a physical location where this inventory stored - that constitute a nexus in the US and in the state of California.
It doesn't matter if you run the business as an individual or have a separate legal entity - rules related to sales tax are same.
Hi Tellena,
Foreign earned income exemption applies to US persons and not to non-residents - so that clause would not apply in your situation. Here are information:
As an US citizen living abroad - you may claim a foreign earned income exclusion.
The person may qualify for the foreign earned income exclusion - he/she should: -- Work and reside outside the United States for at least 330 days during the year, or -- Meet either the Bona Fide or Physical Presence tests.If the person qualifies, he/she may exclude up to $91,400 (2009 in foreign wages -- plus housing allowances (limited to 30% of the earned income exclusion).
To receive that exclusion - the taxpayer should file either form 2555 or 2555EZ.
Here are forms you likely need:
Please be aware that - the exclusion above will not affect self-employment taxes - only income taxes. Only earned income is excludable. For instance dividends, investment income, etc - are not excludable.
Your situation is different - that this would be considered an income from sources in US.
You may want to create a separate legal entity for distribution and have a legal contract with that entity. This way - you will separate US and not US operations.
You may discuss that approach with your accountant.
Tax Preparer
Taxes, Immigration, Labor Relations
Hi,
please see IRS publication 519 - http://www.irs.gov/pub/irs-pdf/p519.pdf page 5 for determination of your tax status - resident or nonresident
See IRS publication 54 - http://www.irs.gov/pub/irs-pdf/p54.pdf - Tax Guide for U.S. Citizens and Resident Aliens Abroad - page 11 - Who qualify for foreign earned Income exclusion.
See also instruction for form 2555 - http://www.irs.gov/pub/irs-pdf/i2555.pdf on the first page
Unfortunately - I may not recommend anyone in LA area.
You may locate a tax office for HRB - use zipcode.
for reference - LA zipcodes you may find here - http://www.mongabay.com/igapo/zip_codes/CA.htm
When you are looking a tax person - mention that you need someone who is familiar with filing for nonresidents.
Ask for option to sign your tax return online without visiting the tax office - if that is more convenient for you.
Please see for reference - http://www.boe.ca.gov/sutax/outofstate.htm
Persons who are "engaged in business" in California (as defined by Revenue and Taxation Code section 6203) are responsible for collecting and remitting the sales or use taxes on all sales of tangible personal property (unless the transaction is otherwise exempt). Circumstances where a retailer is considered to be engaged in business in California, commonly referred to as "nexus," for sales and use tax purposes include (but are not limited to) the following:
See IRS publication 519 page 18 - http://www.irs.gov/pub/irs-pdf/p519.pdf
A nonresident alien's income that is subject to U.S. income tax must be divided into two categories:
Income that is effectively connected with a trade or business in the United States, and
Income that is not effectively connected with a trade or business in the United States
The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate.
Business operations. If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States.
Asset-use test. This test usually applies to income that is not directly produced by trade or business activities. Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected.
Business-activities test. This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business.
I do not see the exact reference as you are looking - so we are in the area of interpretation - I suggest to look the publication 519 - see Business operations. (you own merchandise) and Asset-use test. - see the reference above.
You also may confirm by calling the IRS directly 1-800-829-1040.
Telephone Assistance for Businesses: 1-800-829-4933
Nowadays all states are short on revenue and are very aggressive in collection efforts by all means.
There is an extremely difficult financial situation in California - and while that might depend on the sale volume - we could expect that your handling agent will be contacted by California FTB if there is no registration for sales tax.
Here are about responsibility of your agent:
If you make drop shipments or courtesy deliveries to consumers in California on behalf of out-of-state retailers, you are not liable for tax if the out-of-state retailer holds a California seller's permit or a Certificate of Registration - Use Tax. An out-of-state retailer who is required to hold either permit is considered the retailer and is liable for tax.
However, you are considered the retailer and are generally liable for tax if:
-- The out-of-state retailer is not required to hold a California seller's permit or Certificate of Registration-Use Tax, and
-- The retail sale of the property is subject to California sales and use tax
You are required to obtain a seller's permit if you are considered engaged in business in California where you sell or lease tangible personal property. If you fail to obtain a permit and file back-due returns, a Compliance Assessment (billing) may be issued based upon the information gathered by the SCOP specialist during and/or after the visit. You will be charged a 10 percent penalty on the taxes due for failing to file a return by its due date. You could also be charged an additional 50 percent penalty if it is determined that you knowingly failed to obtain a permit to evade tax.
You are engaged in business in California if you: -- Have an office, sales room, warehouse, or other place of business in this state (even if the location is only temporary). -- Have a sales representative, agent, or canvasser operating in this state. -- Receive rental payments from the lease of tangible personal property in this state. There are other activities that may qualify a selling operation as being engaged in business in California. Due to the various rules that apply, you should contact the Board's Information Center XXX-XXX-XXXX or contact your nearest Board office to determine if you must obtain a permit.
Tellena,
If your handling agent will proceed only your transactions - no additional registration required.
But if your handling agent will represent other partners and will do shipping for them - it might be reasonable for your handling agent to apply for a sales tax permit - and do all paperwork.
If questioned by sales tax authorities how does he prove that he is drop shipping fro an out of state seller(me) who would then be holding a sellers permit?
He would need to keep a shipping record (with addresses) and receipts from shipping company.
As you are selling on a small margin - income tax is not a big issue - but the issue would be a filing requirements on the federal and on the state levels.
The sales tax is imposed on the gross sale.
As you did not charged sales tax from buyers - you may be liable for that amount.
I might suggest to communicate with buyers - assuming you keep track - and ask for California sales tax (with apologies) - I bet some will pay.
Also - customers in other states - are responsible to pay use tax on purchases on their own.
Another suggestion - to move your business location to the state which do not have sales tax (if possible) - that will eliminate some overhead - five US states have no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Sorry for late reply - let me know if you need any help.