Do I have to pay taxes in the US if my online store sells to US customers even though I don't live in the US?

Question

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??

Answer 1

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.