Are you currently working with US sales agents for exporting your goods to the USA? Very often, SMBs like Tom’s company enter the US market after they met some sales agents at international tradeshows. If such an opportunistic approach enables them to conduct a market test at low cost and quite quickly, most of them fail to anticipate next steps at the expense of perennial growth. Let’s follow Tom’s journey to help you avoid common pitfalls.
Meet Tom’s Company:
Headquarters : Europe
Industry : blankets, specialty bedding products, and baby products
Worldwide revenue: $ 20,000,000
US presence: none (EU>US export only)
As they are exhibiting on an international tradeshow in Europe, Company’s representatives are approached by a US sales agent who offers them to sell their products in the USA, a market that they have not explored yet. The agent is already selling similar product lines from Europe to US consumers through online platforms (Amazon, Wayfair, etc.) with pretty much success. The process is attractive: the US agent orders products from Europe (without purchasing them as he is not a reseller), he stores them at his own premises, and then he sells them to US customers through the online platforms on a commission basis.
There is a good fit between Company’s managers and the US agent, who soon receives products to sell on the US market. The first orders come in, the process works well, and Company’s products gain effective exposure and good rankings on the various online platforms.
That’s a great opportunity for Company: no operating cost, hassle-free process, and access to the entire US territory.
2 years later… getting stuck and running risks
Although sales are progressively increasing, Company discovers that the current business model not only limits their expansion but also bears high risks.
1 – Strategic growth: standstill
The agent owns the customer base and does not communicate about customers or market potential. The only information on the market available to Company are the customer reviews on Amazon, and the agent is currently selling on a B2C model only while Company gets significant revenue out of B2B sales in Europe. Are some opportunities being overlooked? How can Company secure partnerships with big players like hotel chains, hospitals, or resellers? Also, it is quite impossible as of today to get an accurate sales forecast.
2 – Logistics: confusion
Company’s products are stored at the agent’s premises, but the agent has not purchased them, which means that the products still belong to Company’s HQ in Europe. Company thus keeps an inventory without knowing exactly when products will be sold and when new products will have to be shipped to the USA.
3 – Tax exposure: risks
Company has an inventory in the USA, which may be identified as a “permanent establishment” by the US tax administration. In as much as the agent sells to consumers (B2C), sales tax is likely to apply on sales made with consumers located in the state that hosts Company’s inventory [see Sales Tax in the USA: Eligibility, Calculation, and Exemptions]. If the agent is subject to a tax audit, Company’s HQ in Europe will most likely undergo a tax audit as well: in that case, the tax administration will inspect Company’s activities worldwide and require tax regularization covering the last 3 years of activity in the USA (sales tax + corporation tax).
4 – CEO’s exposure: liability
Given issues encountered with the sales agent, Company has reached out to resellers directly to accelerate B2B sales. Point is that resellers are now asking Company’s CEO to fill a W7 form, which is a request for a Tax ID Number. The Tax ID number is an identification number ascribed to individuals who are not US residents (in that case, Company’s CEO) and that is used by resellers to report on business activities with foreign suppliers to the tax administration. The immediate consequence for filling a W7 form is that the Tax ID Number’s owner (Company’s CEO) must fill a tax return in the USA!
5 – Legal exposure: annoyance
Since Company has no legal entity in the USA, any dispute arising from US activities will directly involve Company’s HQ in Europe.
What’s next? “It’s time for a change.”
Company is quite lucky to have identified the above-mentioned challenges before running into major problems. Now, it’s time to invest wisely:
Company has decided to create a US entity with the help of a local lawyer: new commercial contracts will be drawn, and the inventory will be transferred from Company’s HQ to the US entity so as to protect Company’s HQ.
Company is hiring a US tax expert to assess tax exposure, calculate potential regularization for the last 2 fiscal years, and conduct a sales tax audit.
Company is assessing options for building a strategic marketing plan (recruiting a local GM, sending employees to the USA, or hiring an outsourced marketing department in the USA) that will help identify growth opportunities on both B2B and B2C segments and secure new business partnerships.
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