Canadian E-Commerce Seller in the U.S.: Amazon FBA Inventory, the Treaty's Storage Exception, State Sales Tax, and the Protective 1120-F

A Canadian seller using Amazon's fulfillment network has a U.S. footprint it never sees — inventory in a dozen states — and the question is what that footprint creates. Federal income tax — the storage exception: a Canadian company selling into the United States from Canada is engaged in a U.S. trade or business if its U.S. activities are regular and substantial (an effectively connected income question); with inventory in U.S. warehouses and sales to U.S. customers, it may be — but the treaty protects its business profits unless it has a U.S. permanent establishment, and Article V(6) excludes from the permanent establishment definition the use of facilities solely for the storage, display, or delivery of goods belonging to the enterprise and the maintenance of a stock of goods belonging to the enterprise for the purpose of storage, display, or delivery (Article V(6)(a) and (b); unlike the OECD model, the treaty doesn't require these activities to be preparatory or auxiliary) — so a Canadian seller whose U.S. presence is inventory in third-party fulfillment centers, stored and delivered by Amazon, generally has no U.S. permanent establishment and no U.S. federal income tax on its profits; the protection is the treaty's, so the seller files a protective Form 1120-F with Form 8833 disclosing the treaty position (the Canadian company expanding to Florida guide's protective filing — preserving deductions if the IRS disagrees and starting the limitations period); a seller that adds U.S. employees, a U.S. warehouse it controls, or a U.S. agent concluding contracts moves past the exception. Where it breaks: a dependent agent in the United States (a U.S. employee or contractor who negotiates with the marketplace or customers on the company's behalf and habitually concludes contracts), a U.S. office, returns processing or kitting done by the company's own people in the United States, or a third-party logistics warehouse that the company effectively controls (dedicated space at its disposal, worked by its own staff, used for more than storage and delivery) can create a permanent establishment; and selling through the company's own U.S. website changes nothing by itself. State income and franchise taxes — the treaty doesn't apply: states set their own nexus rules and aren't bound by the treaty; whether inventory in a state's fulfillment center is physical presence for income and franchise tax purposes depends on the state — Pennsylvania's Commonwealth Court held in 2022 (Online Merchants Guild v. Hassell) that FBA inventory alone didn't give the state nexus over out-of-state sellers for its sales and personal income taxes, while other states, California among them, have pursued FBA sellers on the strength of their inventory — and because storing inventory goes beyond soliciting orders, P.L. 86-272 doesn't shield the seller from a net income tax in a state that asserts inventory nexus (and never covers franchise taxes measured by capital or gross receipts taxes); several states also assert economic nexus for income tax based on sales into the state (a sales threshold); and the gross receipts taxes can apply on sales alone — Washington's business and occupation tax once Washington gross receipts exceed US$100,000 a year, Ohio's commercial activity tax only on Ohio receipts above its US$6 million annual exclusion (from 2025), and Texas's margin-based franchise tax for sellers with more than US$500,000 of Texas receipts, owed only above the US$2.65 million no-tax-due threshold for 2026 and 2027 reports; most states start their income tax from federal taxable income — a foreign corporation with no federal effectively connected income may have zero state base in those states (Florida's base, for example, is the income taxed at federal corporate rates, with no add-back for treaty-exempt income), but states aren't bound by the treaty and some compute the base without it — California, which disregards federal tax treaties, among them; the practical review: the states where inventory sits and sales are largest, each state's position, and the filings (often a no-tax-due return or a gross receipts filing). State sales tax — mostly the marketplace's: every sales-tax state's marketplace facilitator law makes Amazon the collector and remitter on marketplace sales, so the Canadian seller has no sales tax registration for those sales; its own-website sales to U.S. customers are its own obligation in states where it has nexus — economic nexus (sales thresholds — US$100,000 of sales in most states, higher in a few such as California, Texas, and New York at US$500,000) and physical nexus from inventory in the state (the e-commerce entity guide's point — some states treat FBA inventory as creating physical nexus for the seller's own direct sales, though Pennsylvania's courts rejected that position in 2022); the seller registers where required and collects on its direct sales. Import and customs: the goods enter the United States from Canada — the seller is the importer of record (or Amazon's program arranges it — the seller as non-resident importer with a customs broker, the customs bond, and the U.S. Customs and Border Protection entries), with duty under the trade agreement (USMCA — goods originating in Canada qualify for duty-free treatment with the certification of origin; non-originating goods pay the ordinary U.S. duty plus the tariffs for their country of origin — goods made in China and merely shipped through Canada are Chinese goods with China's tariffs; since 2025 the United States has imposed, changed, suspended, and litigated a series of additional tariffs on Canadian goods, including in 2026 Section 338 duties on listed Canadian products that apply even to goods qualifying under USMCA, so the measures in force are checked for each product line at the time of shipment), and the de minimis exemption that once allowed duty-free shipments of US$800 or less has been suspended for all countries since August 29, 2025 and is repealed by P.L. 119-21 from July 1, 2027 — the landed cost the e-commerce deductions guide describes, from the Canadian seller's side. The Canadian side: the company's U.S. sales are active business income in Canada (a CCPC's small business rate if eligible); GST/HST doesn't apply to its U.S. sales (moving its own inventory to U.S. fulfillment centers isn't a supply, sales of goods already in U.S. warehouses are made outside Canada and outside GST/HST and QST entirely, and goods sold and shipped directly from Canada to U.S. customers are zero-rated exports); the U.S. inventory is an asset of the Canadian company (counted at year-end — the e-commerce deductions guide's count, from Amazon's inventory reports); the U.S.-dollar receipts are converted (foreign exchange gains and losses); and the T1135 doesn't apply to the U.S. inventory (property used or held exclusively in carrying on the corporation's active business is excluded from specified foreign property). The marketplace's paperwork: Amazon requires a W-8BEN-E from a Canadian seller (the W-8BEN guide — foreign status, so Amazon doesn't issue a Form 1099-K for a seller documented as foreign — the US$20,000 and 200-transaction threshold that P.L. 119-21 restored applies only to U.S. payees), and the seller's information for the marketplace's own compliance (the INFORM Consumers Act requires marketplaces to collect and verify bank account, tax ID, and contact information from high-volume sellers — 200 or more sales and US$5,000 or more of revenue in a 12-month period). The bookkeeping: the inventory locations by state from the marketplace's reports; sales by state (marketplace and direct); the treaty position and the protective Form 1120-F with Form 8833; the state nexus review and filings; sales tax registrations for direct sales; the customs entries and duty; the W-8BEN-E with the marketplace. The errors: no protective 1120-F (the deductions at risk if the IRS later finds a permanent establishment); a U.S. contractor hired to manage the Amazon account who habitually concludes contracts (a dependent agent); the state gross receipts taxes ignored; the seller's direct-website sales into an inventory-nexus state never registered; non-originating goods entered as duty-free under the trade agreement; and a W-9 given to the marketplace.

Key takeaways

• Inventory in Amazon's U.S. fulfillment centers generally doesn't create a U.S. permanent establishment — the treaty excludes a stock of goods kept solely for storage and delivery — so the profits stay taxable in Canada only.
• File a protective Form 1120-F with Form 8833 to preserve deductions and start the limitations period.
• It breaks with a dependent agent concluding contracts, a U.S. office, or a warehouse the company controls with its own staff.
• States aren't bound by the treaty: inventory in a state can be physical presence for income or franchise tax, and gross receipts taxes can apply on sales alone — review the inventory and sales states each year.
• Marketplace facilitators collect sales tax on marketplace sales; the seller's own-website sales are its obligation where it has economic or inventory nexus.
• Customs: the seller is usually the importer of record — duty-free only for goods that originate in Canada under the trade agreement.

The Canadian e-commerce seller's U.S. file

Treaty position: storage exception; no dependent agent; protective Form 1120-F and Form 8833. Inventory by state; sales by state (marketplace and direct). State nexus review: income, franchise, gross receipts. Sales tax registrations for direct sales. Customs: importer of record, bond, entries, origin certifications, tariffs. W-8BEN-E with the marketplace. Canadian side: active business income, inventory count, currency, zero-rated exports. The protective return and the state review are the two filings sellers skip.

Worked example

A Montreal company selling kitchen products (made in Quebec) on Amazon U.S.: US$2.4 million of U.S. sales, inventory in nine fulfillment centers across seven states, no U.S. employees — its U.S. account manager is a Toronto employee. Federal: no permanent establishment (the treaty's storage exception; no U.S. agent); a protective Form 1120-F with Form 8833 each year. States: the desks review the seven inventory states — two assert franchise or income tax nexus from inventory (a zero-tax return in one that starts from federal taxable income — zero for a treaty-protected company — and the minimum franchise tax in the other), and Washington's business and occupation tax applies because its Washington gross receipts, marketplace sales included, exceed the US$100,000 economic nexus threshold — registered, filed, and paid. Sales tax: Amazon collects on all marketplace sales; the company's own website's U.S. sales (US$180,000) cross the economic threshold in two states, where it registers and collects. Customs: its products originate in Canada under the trade agreement — certified, duty-free, and checked against the Section 338 product lists, whose duties apply even to USMCA goods — entered through its customs broker with the company as non-resident importer of record. The Canadian side: active business income on the T2 and CO-17 (the Quebec cross-border guide's second return), the U.S. inventory counted from Amazon's reports at year-end. A competitor that hired a Florida contractor to negotiate its Amazon vendor agreements and sign them on its behalf had a dependent agent — and a U.S. permanent establishment it discovered in an IRS inquiry.

Official sources

The IRS explains: “A foreign corporation files this form to report their income, gains, losses, deductions, credits, and to figure their U.S. income tax liability.” — Internal Revenue Service, About Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, https://www.irs.gov/forms-pubs/about-form-1120-f

IRS Publication 597 notes: “You may be considered to have a permanent establishment if you meet certain conditions. For more information, see Article V (Permanent Establishment) and Article VII (Business Profits).” — Internal Revenue Service, Publication 597 (10/2015), Information on the United States–Canada Income Tax Treaty, https://www.irs.gov/publications/p597

Practitioner note

A Canadian seller on Amazon U.S. has inventory in a dozen states and, usually, no U.S. permanent establishment — the treaty excludes a stock of goods kept for storage and delivery — but the protection is federal only, and the states where the inventory sits have their own nexus rules, franchise taxes, and gross receipts taxes the treaty never reaches. Our desks file the protective Form 1120-F with the treaty disclosure every year, keep U.S. contract authority out of any U.S. agent's hands, review the inventory and sales states annually, register the seller's own-website sales where nexus exists, and confirm the customs origin claims — while the Canadian return counts the U.S. inventory as its own.

See also: For related guidance, see U.S. taxes for a Canadian Amazon FBA seller; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle Canadian e-commerce sellers in the U.S. — permanent establishment analysis under the treaty's storage exception, protective Form 1120-F and Form 8833 filings, state income, franchise, and gross receipts nexus reviews, direct-sales tax registrations, customs and origin compliance, marketplace W-8BEN-E documentation, and Canadian inventory and currency accounting. See pricing or book a call.