BRDG - SELLING TO THE U.S. FROM THE U.K. - Ecommerce eDITION

12 Mar

Selling Into the U.S. from the U.K. - Key Tax Considerations for Ecommerce Businesses

Expanding into the US is a major milestone for UK ecommerce brands. However, it also opens the door to a complex tax landscape. Whether you are a UK Limited company selling directly to US consumers or operating through a newly formed US entity, understanding your US tax obligations is essential to avoid penalties and scale compliantly.

Here is a high-level overview of the most important US tax issues that UK businesses should consider when entering the market.

1. Sales Tax: The U.S. VAT - but on steroids

Unlike the UK’s centralised VAT system, U.S. sales tax is administered at both the state and local levels. Each state sets its own rates, rules, and exemptions, and many cities, counties, and districts layer on additional taxes. The result is a highly fragmented landscape, with over 13,000 unique sales tax rates across the country. Navigating this complexity is essential for any U.K. business selling into the U.S. market.

What triggers sales tax obligations?

You may be required to register, collect, and remit sales tax in a U.S. state if your business has nexus. This is a fancy term that means taxable presence in that state. Nexus can be created in several ways:

Physical Presence

Employees or contractors
Office space, remote workstations, or co-working desks
Business property or fixed assets
Inventory stored in warehouses (e.g., Amazon FBA or 3PL centers)

Economic Presence

Exceeding a state’s annual sales or transaction threshold

Generally, $100,000 in sales or 200 transactions annually

However, some larger states set higher thresholds. For example:

California – $500,000 in sales
New York – $500,000 in sales and 100 transactions
Texas – $500,000 in sales

If your business exceeds a state’s threshold, you are required to register and collect sales tax in that state even if you have no physical operations there.

Example:
If your business stores inventory in 3PL warehouses located in California and Texas, your business has nexus in both states even if there is no office or employees there. This means the business is required to register, collect, and remit sales tax in California and Texas.

Even if you are a UK company selling directly from overseas, holding inventory in a US state triggers sales tax nexus and registration may be required before you make your first sale.

Many UK sellers underestimate how widely nexus can apply when working with US-based fulfillment providers. Failing to comply can result in penalties, interest, and back taxes. Addressing nexus early can help avoid costly consequences and ensure your business scales compliantly in the US market.

2. Federal Income Tax: Who needs to file?

If you are selling into the US without establishing a US entity, you might think you are off the hook for federal tax compliance. However, that is not always the case.

Non-US companies should consider filing a protective federal income tax return (Form 1120-F, Protective). This filing helps preserve the company's rights under the UK–US tax treaty and protects the business from double taxation or penalties.

Filing Form 1120-F can:

Assert that the business does not have a “permanent establishment” in the US (i.e., no fixed place of business), and therefore is not taxable on US profits
Start the statute of limitations, which gives the IRS only three years to challenge your tax position
Preserve the right to claim deductions and credits if the IRS later determines tax is owed
Help avoid penalties in the event of an audit

Even if no tax is due, filing Form 1120-F protectively can be a smart risk management strategy for UK businesses operating in the US.

3. State Income Tax: Again, who needs to file?

Federal tax is just one piece of the puzzle. Many US states impose their own income taxes, which operate independently of federal tax rules and treaties.

Even if your business qualifies for an exemption under the UK–US tax treaty at the federal level, state income tax may still apply.

Unlike federal tax, there are no tax treaties between individual US states and the UK. This means your business could be exposed to double taxation at the state level, especially in states where you have nexus. For income tax purposes, nexus can be created through:

Physical Presence

Same as above

Economic Presence

Exceeding a state’s annual sales or transaction threshold

Generally, $500,000 in sales

However, some states set lower thresholds. For example:

Michigan – $350,000 in sales
New Jersey – $100,000 in sales

Many businesses discover these obligations too late, leading to unexpected tax bills and compliance headaches.

4. Should You Form a US Subsidiary?

One of the biggest strategic questions is whether to keep selling directly from the UK or form a US entity.

Here are some signs it may be time to consider a US subsidiary:

You want to build local credibility with US retailers, distributors, or customers who prefer to partner with a domestic company.
You plan to hire US-based employees or contractors who require being on a US payroll.
You are generating significant US revenue and want clearer legal and tax separation between your UK and US operations.

Forming a US subsidiary provides benefits for the brand in the US. However, it also comes with additional complexity, including:

More complex US corporate tax returns
Managing transfer pricing and intercompany agreements
Navigating intricate state-specific compliance and reporting requirements

If you choose to form a subsidiary, you will also want to consult tax advisors experienced in cross-border ecommerce to optimise your tax position.

5. Intercompany Considerations

Setting up a US entity means managing the relationship between your UK parent company and your new US subsidiary. This involves:

Establishing transfer pricing arrangements that determine how much the US entity pays the UK company for goods, services, or intellectual property
Handling intercompany pricing and reporting properly to avoid tax issues related to profit shifting between jurisdictions
Planning for the repatriation of profits back to the UK, which can have cashflow and tax implications
Working with experienced cross-border UK and US advisors to build compliant, tax-efficient cross-border structures

6. Practical Steps for UK Ecommerce Sellers Entering the US

Here are some actionable steps to get your tax compliance on track as you expand into the US:

Identify where your inventory is stored and check for sales tax nexus in those states.
Register for sales tax and income tax in states where you have nexus before receiving any notice from tax authorities. Early registration helps avoid penalties and interest.
Engage with a US tax expert to ensure you file federal and state income tax returns as needed.
Based on your US operations and growth plans, decide when it makes sense to establish a US subsidiary for operational and tax efficiency.
Set up accounting software capable of tracking sales by state, managing tax rates, and ensuring timely reporting and remittance.
US tax regulations change frequently. Stay updated or work with a knowledgeable partner to remain compliant.

Final Thoughts

The US is a huge opportunity, but its tax system is complex. Being proactive can save your business from costly mistakes and ensure you scale with confidence.

At BRDG, we specialize in helping UK companies enter and scale in the US market with the right tax infrastructure from day one.

Want to chat about your U.S. expansion plans? Reach out at sonia@brdg.us or visit www.brdg.us to learn more.

Sonia Kanjee