Does a factory that produces in China and sells to Costco file a U.S. income tax return?

Generally no. Under IRC §863(b), income from cross-border sales of self-produced inventory is sourced only by where production happens; produced in China and sold FOB China with Costco importing, it is generally foreign-source and usually not taxed by the U.S. The factory gives Costco a W-8BEN-E.

What changes if the factory opens a U.S. office?

Sales by a nonresident attributable to a U.S. office or fixed place of business are sourced under the §865(e)(2) rules and may be U.S.-source and effectively connected. Staff in the U.S. negotiating and signing deals can also create a treaty permanent establishment, requiring Form 1120-F.

Does Costco withhold tax on royalties for Kirkland Signature production?

Generally not relevant. Costco owns the Kirkland Signature trademark; the factory makes goods to Costco's specs and is paid for goods, not royalties. Payment for goods isn't FDAP income and generally isn't withheld on.

What if a foreign company with ECI doesn't file Form 1120-F?

Under §882(c)(2) and its regulations, failing to file a timely, true and accurate 1120-F can cost the company its deductions, leaving tax on gross income; besides the 21% corporate tax, a 30% branch profits tax may apply (reducible by treaty).

Kirkland Signature Factories and U.S. Tax: FOB, DDP, ECI

Whether a Chinese factory making Kirkland Signature products, or supplying its own products to Costco, owes U.S. income tax turns on three questions: is the income U.S.-source, is there a U.S. trade or business, and is there a permanent establishment under the U.S.–China tax treaty? A factory that produces in China and sells FOB a Chinese port, with Costco as importer, generally has foreign-source income under IRC §863(b) and usually no U.S. income tax. Switching to DDP, holding U.S. inventory, stationing staff or opening an office can create effectively connected income (ECI) and a Form 1120-F filing.

What is the relationship between a Kirkland factory and Costco?

Kirkland Signature is Costco's private label, and Costco owns the trademark. Costco's fiscal 2026 Form 10-K says it both purchases and manufactures private-label merchandise, that Kirkland products generally earn higher margins than national brands, and that it expects their share of sales to keep growing.

A factory making Kirkland products produces to Costco's specifications, packaging and brand and sells the goods to Costco. The brand is Costco's, so the factory is paid for goods, not royalties, and the 30% U.S. withholding on royalties doesn't come into it. Costco chooses its manufacturers, and its Supplier Code of Conduct (December 2023) applies to them: every production facility must be disclosed and approved, undisclosed subcontracting is a violation, and Costco may audit.

How is income from self-produced goods sourced?

The 2017 tax act amended IRC §863(b). For tax years beginning after 2017, income from cross-border sales of inventory the taxpayer produces is sourced solely on the basis of where the production activities take place. Treasury Regulation §1.863-3 adds that when production happens in one place only, income is sourced where the production assets are.

A manufacturer with plants only in China therefore generally has entirely foreign-source income on sales to Costco, whether goods are handed over at a Chinese port or delivered to a U.S. depot, and wherever title passes. Trading companies differ: a business that buys and resells rather than produces generally sources inventory sales where title passes (§861(a)(6)), so DDP delivery with title passing in the U.S. may produce U.S.-source income.

When can goods made in China still be taxed by the U.S.?

A U.S. office or fixed place of business. Regulation §1.863-3 carves out sales by a nonresident attributable to a U.S. office, which are sourced under the §865(e)(2) rules and may be U.S.-source. A factory that rents a U.S. office, or stations a sales manager in the U.S. to work with Costco buyers and negotiate and sign deals, needs its own analysis.

A U.S. trade or business and a permanent establishment. The U.S. taxes a foreign enterprise's business profits when they are effectively connected with a U.S. trade or business; under the U.S.–China treaty, they must also be attributable to a U.S. permanent establishment. Under the treaty, facilities used solely to store, display or deliver the enterprise's own goods generally aren't a permanent establishment, but a person in the U.S. who habitually concludes contracts on your behalf can be.

DDP and U.S. inventory. Under DDP you (or a forwarder) import, and goods in a U.S. warehouse remain yours. The warehouse alone is generally not a permanent establishment, but people in the U.S. processing orders or negotiating with Costco change the picture and have to be considered together.

What does not filing cost?

A foreign corporation with ECI files Form 1120-F, pays 21% federal corporate tax, and may also owe the 30% branch profits tax (which a treaty can reduce). Under §882(c)(2) and its regulations, a foreign corporation that doesn't file a timely, true and accurate 1120-F can lose its deductions and be taxed on gross income. A treaty-based position that income isn't taxable generally needs disclosure on Form 8833, and where the facts are unclear, a protective Form 1120-F is worth considering.

How can a factory set this up safely?

FOB exports only: sign through the home company, give Costco a W-8BEN-E, and don't open a U.S. office or send staff to sign deals; disclose facilities and related parties under the Code of Conduct. This is the simplest U.S. tax position. The trade-off is a lower price, and Costco may ask to reprice when it bears tariff changes.

DDP or costco.com drop-ship: most factories form a U.S. subsidiary to import and supply, keeping U.S. operations inside a U.S. company. The subsidiary files Form 1120 at 21% federal and, if 25% or more foreign-owned, attaches Form 5472. The factory's price to the subsidiary must be arm's length under §482; it is also the declared customs value, and §1059A caps the subsidiary's inventory cost at that value.

An example

Example (hypothetical numbers, to show the method): an appliance factory in Ningbo makes Kirkland products, supplying $3,000,000 a year. Option one, FOB Ningbo with Costco importing: the income is foreign-source under the production rule, and the factory generally files no U.S. income tax return. Option two: to get a higher price the factory moves to DDP, rents third-party warehouse space in New Jersey, and stations a sales manager in Seattle who regularly negotiates prices and signs amendments with buyers. Now the Seattle presence may be a permanent establishment, and related sales may be U.S.-source under §865(e)(2). The factory should assess a Form 1120-F filing or move the U.S. business into a U.S. subsidiary.

Learn more

For the supplier process, an FOB and DDP comparison, an entity-choice table, state tax and deduction bookkeeping, see the guide to becoming a Costco supplier; for a U.S. subsidiary's filing checklist, see the guide for Chinese parents with U.S. subsidiaries. To review your own structure, book a free 15-minute call or add WeChat YCLUSA. Complex permanent establishment and transfer pricing questions can go to a paid consultation.