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I own a website and I sell digital content. I'm a nonresident alien with the US. Most of my customers are US based so I was wondering will I have to pay any taxes to the US?

I have read that

For nonresidents, taxable income is separated into two categories:

  1. Income that is effectively connected with a U.S. trade or business, after the deductions that are allowed, is subject to U.S. income tax at graduated rates - the same rates that apply to U.S. citizens and residents - or lower rates if the provisions of a tax treaty apply.

  2. Income that is subject to U.S. income tax, for being U.S. source income, but that is not effectively connected with a U.S. trade or business, is subject to a flat 30% tax

Is this true and do I belong to any of these categories?

If I form an LLC or C corp am I liable for this withholding tax?

My customers are based in the US and I believe all income is considered FDAP income according to the IRS:

Fixed, Determinable, Annual, or Periodical (FDAP) income is all income, except:

  • Gains derived from the sale of real or personal property (including market discount and option premiums, but not including original issue discount)
  • Items of income excluded from gross income, without regard to the U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income

The thing is the IRS also says:

Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income. Effectively Connected Income should be reported on page one of Form 1040NR. FDAP income should be reported on page four of Form 1040NR.

In the last quote, it’s like they say it only applies to passive income but if they feel like it, they can apply this to all income??

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    I am in the US, and if I sold online all over the world it would not occur to me that I'd need to know the tax code for the hundreds of countries in the world. I'd only be concerned about my own country tax code. – JTP - Apologise to Monica Jun 28 '13 at 4:28
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You're not physically present in the US, you're not a US citizen, you're not a green card holder, and you don't have a business that is registered in the US - US laws do not apply to you. You're not in any way under the US jurisdiction.

Effectively connected income is income effectively connected to your business in the US. You're not in the US, so there's nothing to effectively connect your income to.

Quote from the link:

You usually are considered to be engaged in a U.S. trade or business when you perform personal services in the United States.

You ask:

If I form an LLC or C corp am I liable for this withholding tax?

If you form a legal entity in a US jurisdiction - then that entity becomes subjected to that jurisdiction.

If you're physically present in the US - then ECI may become an issue, and you also may become a resident based on the length of your stay.

  • I believe US Laws can apply to me IF I'm getting "US sourced income". I'm not sure where digital content falls in. This is the link from the IRS about it: irs.gov/Individuals/International-Taxpayers/… – Jose Rodrigues Jun 28 '13 at 5:32
  • I believe digital content would be: "Business income: Sale of inventory -produced Where produced (Allocation may be necessary)" – Jose Rodrigues Jun 28 '13 at 5:34
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    @Jose did you produce it in the US? – littleadv Jun 28 '13 at 5:35
  • No I did not. I believe that "Business income: Sale of inventory -purchased Where sold" is only for shipped physical goods... not sure though... – Jose Rodrigues Jun 28 '13 at 5:39
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    Jose, I think you should consider @Joe's point. If you have a Russian customer - are you going to study Russian tax laws? If you have someone from Germany - will you file a tax return in Berlin? Why are you considering American law any differently? You need to deal with the tax laws that do apply to you, in your own country. – littleadv Jun 28 '13 at 5:41

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