What to consider when going global
Q. I operate a local online business selling a combination of locally sourced and imported apparel. I would like to expand into overseas markets with the aid of an outsourced warehousing and fulfilment service - Shipwire has been high on candidate list.
Given a new "physical presence" in the US, would we need to register as a business, and more importantly, would we need to pay tax to the IRS (Internal Revenue Service)? Does the use of a physical warehouse and fulfilment service necessitate this? Some of the products will be shipped directly from US wholesalers to our rented US warehouse.
We currently export to foreign markets - but I feel having an actual presence in one may complicate things.
A. Congratulations on having successfully developed your online business to a stage where you are now looking at overseas expansion.
I should preface my response by stating that I am not an accountant or lawyer and I recommend you obtain professional advice in this area. My comments should be construed as general advice only.
My understanding is that foreign corporations only become liable to pay tax in the US where they have set up branches within the US to carry out their operations. Branches are fixed places of business that employ staff and generate revenues and therefore carry taxation liabilities.
As it appears that you will be outsourcing your warehousing and fulfilment activities to a company in the US, this company will be incurring the taxation liability and not you. This company will be liable for payment of US taxes and will no doubt have allowed for the payment of these in its calculations of its financial arrangements with you.
The profits you derive on your US sales will be repatriated to Australia and will be taxable here.
As you are not conducting any operations within the US I would not see a reason why you would need to register a business there.
However I am a little confused as you also indicate that you may be renting a warehouse in the US yourself. If so, this may well be regarded as conducting operations within the US which could make your US operations taxable there and could also mean you may need to register a business in the US.
I suggest that you need to carefully weigh up the options here. If you can set things up in a way that obviates the need to pay tax in the US, this would appear to be the best way forward, at least initially until you have ‘tested the waters’.
Once things are running well in the US you might then consider expanding in the US, including establishing a subsidiary company there and setting up your own operations.
Once again professional advice appears well worthwhile so that you achieve your goals in the most effective manner possible.
Good luck with your expansion in the US.
Guy Ward, business mentor, Small Business Mentoring Service