Does inventory in a CastleGate warehouse give me physical presence in that state?

Generally yes. The inventory is your property, and wherever it sits you have physical presence, regardless of sales volume. That can mean sales tax registration (reporting sales to Wayfair as exempt resales) and income or franchise tax, such as the Texas franchise tax or California's $800 minimum.

Does a Chinese factory supplying Wayfair directly owe U.S. federal income tax?

It depends on the facts. Income from selling inventory it produces is sourced where production happens, so goods made in China generally produce foreign-source income. Without a U.S. office, employees or agents signing deals, that usually isn't effectively connected income. A U.S. showroom with staff negotiating prices can change the answer.

With no ECI, should a foreign supplier still file Form 1120-F?

A foreign corporation with no ECI generally has no federal income tax return to file. In a gray area, a timely protective Form 1120-F preserves the right to deduct costs if the IRS later finds ECI. For a foreign corporation without a U.S. office, it is generally due on the 15th day of the 6th month after year-end.

CastleGate Inventory: State Nexus and ECI for Foreign Suppliers

Q: Does the U.S.-China tax treaty cover state taxes?

Generally not. The treaty governs federal income tax, and most states aren't bound by it. A foreign company that owes no federal tax because of the treaty or a lack of ECI can still have state filing obligations in its inventory states.

Putting goods into Wayfair's CastleGate warehouses means you hold inventory in the states where those warehouses sit. For the states, that is physical presence: sales tax registration, Texas franchise tax and California's minimum franchise tax can follow, and state taxes generally aren't covered by the U.S.-China treaty. Federal income tax is a separate question: income from selling goods a Chinese factory produces is generally sourced where they're made, and without a U.S. office or agents it usually isn't effectively connected income (ECI). Put people or an office in the U.S., and the answer can change.

What CastleGate is and where the goods go

CastleGate is Wayfair's logistics network. CastleGate Fulfillment lets suppliers forward-position inventory in Wayfair's warehouses in the U.S., Canada and the U.K., and Wayfair picks and ships; since 2025 a multichannel program can also ship your orders from other sales channels out of the same inventory. CastleGate Forwarding is the freight arm, with 5 consolidation centers in China, 2 in Southeast Asia and 1 in India, covering ocean freight, customs brokerage through designated licensed brokers, and drayage to the warehouse.

For a Chinese factory without a North American warehouse, CastleGate is close to the standard route to Wayfair, since Wayfair requires orders to ship from a warehouse or 3PL in North America. The catch: Wayfair decides which states your goods sit in for its own logistics reasons, and you may not know in advance.

The state layer: inventory is nexus

Physical presence has no threshold. Economic nexus thresholds for sales tax (usually $100,000 a year) apply to remote sellers; inventory inside a state is physical presence regardless of sales. Even though your sales to Wayfair are exempt resales, states where you have physical presence usually expect you to register, report those sales as exempt and keep Wayfair's resale certificate.

Income and franchise taxes. Federal P.L. 86-272 protects only sellers whose in-state activity is soliciting orders; inventory in the state generally takes you outside it, and it never covers gross-receipts taxes. The Texas franchise tax has a no-tax-due threshold of $2,650,000 for 2026 and 2027 reports, with nexus at $500,000 of Texas receipts; below the threshold there's no tax, but the information report is still due. Washington's B&O tax is on gross receipts. Companies and LLCs doing business in California (sales, property or payroll above California's annually published thresholds) pay at least $800 a year in franchise tax.

States don't follow the treaty. The U.S.-China treaty binds federal income tax; most states aren't bound by it. A foreign company that owes no federal tax because of the treaty can still have state filings.

Knowing where your goods are. Download CastleGate inventory and receiving reports from Partner Home, map warehouses to states, and keep a quarterly list of inventory states as the working paper for state tax decisions.

The federal layer: does a foreign supplier have ECI?

This section is about a Chinese company supplying directly, or through a foreign-owned single-member LLC that hasn't elected corporate status. If you supply through a U.S. C corporation, that company is the taxpayer, files Form 1120 and pays 21%, and none of this analysis is needed.

Step one: is there a U.S. trade or business? Regular, continuous sales into the U.S., with inventory here, will usually count as business activity in the U.S.

Step two: is the income U.S. source? Under IRC §863(b), income from selling inventory you produce is sourced by where the production activity happens. Furniture made in China and sold to Wayfair generally produces foreign-source income. Goods bought and resold (not produced) follow a different rule, generally where title passes.

Step three: when foreign-source income becomes ECI. Foreign-source income is generally not ECI. The exception is when the foreign business has an office or other fixed place of business in the U.S. and the sale is attributable to it (IRC §864(c)(4)(B), §865(e)(2)). So the key facts are whether you have a U.S. office, employees or a showroom, and whether anyone in the U.S. negotiates, prices or signs deals for you. A 3PL or CastleGate warehouse is generally not your office; staff stationed there or your own operations inside it would call for a fresh look.

Step four: the treaty. Article 5 of the U.S.-China treaty generally says facilities used solely to store, display or deliver the enterprise's goods are not a permanent establishment, while a dependent agent who habitually concludes contracts in your name can be. Where the treaty applies, business profits may be exempt from U.S. tax, though the treaty position may need to be disclosed on a return.

Should you file Form 1120-F?

No ECI usually means no federal income tax return. But a foreign corporation in a gray area can file a timely protective Form 1120-F stating that it believes it has no ECI. The benefit: if the IRS later decides there was ECI, you can still deduct costs and expenses, which can be denied when no timely return was filed. For a foreign corporation without a U.S. office, Form 1120-F is generally due on the 15th day of the 6th month after year-end. Whether to file is a case-by-case call.

With ECI. A foreign corporation files Form 1120-F at 21% and may owe branch profits tax; a foreign individual files Form 1040-NR. The form given to Wayfair changes from W-8BEN-E to W-8ECI.

A foreign-owned single-member LLC. With or without ECI, the LLC files pro forma Form 1120 plus Form 5472 every year, with a $25,000 starting penalty for each missed form. Wayfair should get the owner's W-8, not a W-9 under the LLC's EIN.

A scenario

Example (hypothetical facts, to show the analysis): a Chinese furniture factory supplies Wayfair directly through its Chinese company. Goods move through CastleGate Forwarding into CastleGate warehouses in two states. The factory has no U.S. employees or office, and all contracts are signed in China.

Federal: the inventory is produced in China, so the income is generally foreign source; with no U.S. office or agents it usually isn't ECI; under the treaty, storage and delivery facilities aren't a permanent establishment. The factory gives Wayfair a W-8BEN-E and can consider a protective Form 1120-F.

State: both inventory states see physical presence, so sales tax registration and income or franchise tax need review. If one is Texas, the franchise tax information report is due, and tax as well once Texas receipts pass the threshold.

In year two, the factory leases a showroom in Los Angeles and stations two salespeople there to negotiate prices with Wayfair's buyers. Now there may be a U.S. fixed place of business with sales attributable to it, and the federal answer needs to be redone. Many factories move to a U.S. subsidiary at this point.

The import layer

Wayfair's CastleGate terms put customs documentation on the supplier, along with the risk of classification, valuation and compliance. A Chinese factory acting as its own importer of record (a nonresident importer) needs customs registration and a bond, and duties go into inventory cost. As of November 2026, Section 301 duties on Chinese-origin goods remain, and upholstered wooden furniture and kitchen cabinets and vanities also carry 25% Section 232 duties, set to rise on January 1, 2027.

The full Wayfair supplier picture, entity comparison and a $2,000,000 worked example are in the Wayfair supplier guide; filings for foreign-owned single-member LLCs are in the Form 5472 guide; more on inventory states and tariffs is in the Amazon FBA guide. Book a free 15-minute call or add WeChat YCLUSA.