Selling in the USA: Sales Rep, Distributor or Subsidiary

If you want to sell in the USA, your first choice isn't the state, it's the model: direct from Europe, through a sales representative, through a distributor, through your own company, or online. Each model splits customs, liability and taxes differently. This guide shows what tax treaties say about a permanent establishment created by an agent, which rules apply to agency and distribution agreements, and what your own US sales company involves.

The USA isn't a market you can serve from a single trade fair booth. If you want to sell there for the long haul, you choose a model, and that model decides who imports, who is liable, who collects sales tax, and whether your company becomes taxable in the USA. That holds for a machine builder in Sweden just as much as for a manufacturer in the Netherlands or a brand from Ireland.

This guide is part of our overview of US market entry, which ties together legal structure, location, visa and taxes. Our 10 facts about US market entry clear up the usual concerns. Here we tackle the question in between: who do you reach your customers through, and what follows from that?

1Five ways to reach American customers

At heart there are five models. With direct sales, your company in Europe sells straight to customers in the USA. With a sales representative, a person or firm in the USA brings in orders that your company accepts. With a distributor, an American company buys your goods and resells them in its own name. With your own company, a US subsidiary handles sales. And with e-commerce, you reach customers through your own shop or a marketplace.

The models aren't mutually exclusive. Many businesses start with a distributor and later set up a subsidiary that looks after key accounts directly. Others sell through a marketplace while working with reps in specialist retail. What matters is that each model is set up cleanly on its own, because customs, taxes and liability follow what actually happens, not what the contract calls it.

Three questions come up in every model. Who is the Importer of Record and therefore owes the duty? Our guide to tariffs, origin and customs clearance answers that. Who owes sales tax to the end customer? That's covered in our overview of sales tax in the USA. And does your company create a permanent establishment in the USA? That's what the following sections are about.

2Selling direct from Europe

Direct sales hit their limit when it comes to service and proximity. American customers expect a contact in their time zone, fast delivery and spare parts from inside the country. As soon as you put people in the USA to do that, you're into one of the next models.

3The sales rep and permanent establishment

The consequence of a permanent establishment: the share of profit attributable to it is taxed in the USA, and your company files a US return for foreign corporations, Form 1120-F. If you believe your activity is so limited that it doesn't trigger taxable US income, you can still file a protective return on time. The regulations expressly allow this so that deductions and credits are preserved if that assessment later turns out to be wrong. If no return is filed, those deductions are lost unless the return arrives within 18 months of the due date. If you rely on a treaty to avoid attributing profits to a permanent establishment despite activity in the USA, you disclose that position on Form 8833.

Alongside tax law, state contract law applies. Texas governs rep agreements in Chapter 54 of the Business and Commerce Code: an agreement to solicit wholesale orders in Texas must be in writing or electronic and must set out how commission is calculated and paid. A clause naming a venue outside Texas is void. Anyone who fails to pay commission as agreed is liable for three times the amount plus attorney's fees, and these rules can't be waived by choosing another state's law. The Texas chapter provides no goodwill indemnity at the end of the agreement. Other states have their own rules, so the agreement should always follow the law of the state where your rep works.

4The distributor: buy, store, resell

A distributor buys your goods, takes ownership of them and resells them in its own name. It is usually the Importer of Record, pays the duties, stores, delivers, invoices and collects and remits sales tax from its customers. For your company, this is the calmest model for tax purposes: the distributor trades on its own account and is therefore not an agent within the meaning of Article 5(5).

The price you pay is control. The distributor sets prices and presentation toward end customers, and the customer relationship belongs to it. That's why a distribution agreement covers more than price and lead time: territory, exclusivity, minimum purchases, use of your brand, training and service, reporting duties and, above all, termination and what then happens to inventory and customers. Register your trademark in the USA yourself before signing the first agreement; the guide Protecting your trademark in the USA shows how.

If you exclude the UN Convention on Contracts for the International Sale of Goods and choose a state's law, Article 2 of the Uniform Commercial Code applies in that state's version; in Texas that's Chapter 2 of the Business and Commerce Code. Some rules surprise European sellers. For a price of $500 or more, a sales contract is only enforceable if there's a signed writing. Between merchants, additional terms in an order confirmation become part of the contract if the offer doesn't exclude them, they don't materially alter the contract and nobody objects. And by law the seller warrants that the goods are merchantable and, where the intended use is apparent, fit for that purpose.

If you want to exclude these warranties, you must mention merchantability expressly, and the exclusion must be in writing and conspicuous; wording such as "as is" also excludes them. Claims under a sales contract become time-barred four years after the breach, and for warranties generally from delivery; the contract can shorten this period to one year but not extend it. Your contract with the distributor offers only limited protection against liability toward end customers; more on this in the guide Product liability and product approval.

Does your distributor become a franchisee? Under the Federal Trade Commission's Franchise Rule, a franchise exists when three elements come together: the partner sells under your brand, you exercise significant control over or provide significant assistance with its operations, and it pays you a required payment to get started. Buying reasonable quantities of goods at bona fide wholesale prices does not count as a required payment, and payments under $735 in the first six months do not trigger the rule. A classic distributor is therefore usually not a franchise. But if you charge entry fees and set operating requirements, check federal law and the state laws that the Rule expressly allows to remain in force, some of which may require registration.

5Your own US sales company

With your own company, you bring sales in-house. The US subsidiary buys from the parent, imports, employs sales staff and service technicians, and sells to customers. For tax purposes, the picture changes: under Article 5(7) of the tax treaties, merely controlling a company in the other state does not make either one a permanent establishment of the other. The subsidiary is a US taxpayer in its own right, as a C Corporation with a federal rate of 21 percent on its taxable income, and the parent stays at arm's length.

In return, you take on obligations a distributor never has. A US company that is at least 25 percent foreign-owned reports its transactions with the parent on Form 5472. Miss that and the penalty is $25,000, plus another $90 for each 30-day period or part of one if the failure continues more than 25,000 days after the IRS notifies you. Prices between parent and subsidiary must hold up to the arm's-length standard: Article 9 of the tax treaties allows an adjustment if they don't, and Section 482 of the Internal Revenue Code gives the IRS the same power. The same price also sets the customs value of the import. If the subsidiary pays profits to a parent holding at least 10 percent of the voting rights, the treaty caps withholding tax at 5 percent; at 80 percent or more held for twelve months, and subject to further conditions, it falls away.

Two filings are often forgotten. If you set up a new US company with foreign ownership of at least 10 percent, you report it to the Bureau of Economic Analysis within 45 days on Form BE-13; if the expected costs do not exceed $40 million, the exemption claim is enough. And if you employ staff, you need payroll that complies with federal and state law: our Payroll service. If you send your own people over from Europe, there is also the visa; for executives and specialists of an established company, the L-1 visa is the usual route, and our article on sending employees to the US covers the details.

Subsidiary or a branch without separate legal personality is a decision of its own, with consequences for liability and tax. It is covered in the guide Branch or subsidiary. How we set up a US Corporation as a subsidiary of your company is explained on our Corporation page.

6E-commerce and marketplaces

In e-commerce, the models blur. If you sell through your own online shop from Europe, that is direct sales, with all the consequences for customs and sales tax. Since the $800 de minimis threshold was suspended, every shipment goes through formal entry; many merchants therefore clear larger quantities once and ship from a warehouse in the US. A warehouse used only to store and deliver your own goods is not a permanent establishment under Article 5(4). For sales tax, however, it matters: Texas, for example, treats a seller that maintains a warehouse, distribution center or representative there as engaged in business in the state.

When you sell through a marketplace, in many states the operator takes on the seller's obligations for sales made through it; Texas, for example, assigns the marketplace provider the seller's rights and duties and requires it to collect the tax. Which states still require the seller to register is shown in our overview on registration of marketplace sellers; the specifics of Amazon are covered in the guide Selling on Amazon USA. How to set up your own shop for US customers, with payment providers, returns and sales tax, is explained in the guide Shopify and your own online shop.

7Which model suits which company

For a first test of the market with products that need little explanation, direct sales or a marketplace is often enough. For products that need explaining and are sold through specialist dealers, such as machinery, components or medical technology, an independent agent is a fast route to customers, provided the contract avoids dependence and complies with the law of the agent's state. If you want to hand off warehousing, customs and customer risk, choose a distributor and negotiate margin, territory and termination in return.

As soon as you want to employ your own people in the US, manage customers yourself or build a location, your own company is the clean framework. It separates the risk from the parent, makes you the importer on your own terms and opens the door to state incentive programs tied to jobs and investment. Our guide to site selection and incentives explains which ones.

Switching between models is the delicate moment. Moving from a distributor to your own company means ending the distribution agreement under its own terms, taking over inventory and transferring customers; ending an agent relationship in Texas without a compliant contract means paying all outstanding commissions no later than the 30th working day afterward. So plan the exit into every contract from the start.

In short

• There are five models to choose from: direct sales from Europe, sales agent, distributor, your own US company and e-commerce; each allocates customs, liability and tax differently.
• Agency and distribution agreements are governed by state law; Texas, for example, requires agency agreements in writing and makes out-of-state venue clauses void.
• Between your company and a US buyer, the UN Sales Convention applies unless you exclude it; otherwise the state's Uniform Commercial Code applies.
• Your own US subsidiary is not a permanent establishment risk for the parent but a taxpayer in its own right, with Form 5472, transfer pricing and payroll.

How we help you

• US market entrySubsidiary, staff, taxes: your start in the US market.
• Form a CorporationThe US corporation (Inc) for growth, investors and your visa.
• Tax structureA clean structure between parent company and US subsidiary, or between you and your US company, coordinated with your accountant.
• PayrollPayroll, payroll taxes and filings for your employees in the USA.
• Sales taxRegistration and returns in the states where you have nexus.
• Withholding taxW-8 forms, withholding and treaty benefits, done right.
• Company formation consultationEntity type, state and tax consequences, before you commit.