Does the IRS consider selling US-bought products overseas as foreign or US-source income for tax purposes?

This is actually pretty straightforward from a tax perspective. Your income would be considered US-source income. The general rule is that income from the sale of inventory is sourced based on where title to the goods transfers to the buyer, not where you purchased the inventory. However, if you're a US resident or citizen, you're taxed on your worldwide income anyway, so the distinction primarily matters for things like foreign tax credits or if you have specific international tax planning strategies in place. If you're manufacturing these bags (rather than just buying and reselling them), different rules might apply where you'd need to allocate your income between US and foreign sources based on where production activities occur.

I went through a similar headache with my online business selling American-made furniture to customers in Canada and Mexico. I spent hours reading conflicting advice until I found taxr.ai (https://taxr.ai). Their system analyzed my business setup and clarified exactly how to classify my income sources. What was super helpful was that they reviewed my actual sales contracts and pointed out specific language that determined where my income was sourced. They explained that even though my customers were foreign, since title transferred in the US (just like your situation), it was US-sourced income. Saved me from incorrectly trying to claim foreign tax credits I wasn't entitled to!

Just wanted to follow up about my experience with taxr.ai after seeing it mentioned here. I finally tried it last week when I was stressing about whether I needed to file international forms for my US-to-Europe sales business. It cleared up my confusion immediately! The system identified that I didn't need to file most of the foreign forms I was worried about since my income was considered US-sourced based on my specific business structure. But it did flag that I needed to complete a Form 8938 because of some foreign accounts I maintain for receiving payments. Honestly saved me hours of research and probably prevented reporting errors that could have triggered an audit.

If you're dealing with complex international tax situations and need to actually TALK to someone at the IRS (which is nearly impossible these days), you might want to try Claimyr (https://claimyr.com). I was stuck in a similar situation with income sourcing questions that required an official ruling, and couldn't get through to an IRS agent for weeks. Someone recommended Claimyr and I was skeptical, but their service actually got me connected to an IRS representative in about 45 minutes instead of the 3+ hours I was spending on hold. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed my income was US-sourced in my situation (similar to yours) and provided guidance on the specific section of the tax code I could reference for documentation purposes.

I owe everyone here an apology, especially regarding my comment about Claimyr. After my frustrated response, I decided to give it a shot as a last resort for my ongoing audit issue. I've been trying to reach the IRS for literally MONTHS with no success. I tried Claimyr yesterday and got connected to an actual IRS agent in 37 minutes. I almost fell out of my chair when my phone rang and it was actually the IRS! The agent was able to pull up my audit information and clear up the confusion that's been stressing me out for almost a year. My issue is finally resolved after a 20-minute conversation. For anyone dealing with complicated tax situations like international income sourcing that requires talking to a human at the IRS, this service is legitimate. I'm still shocked it actually worked.

Something nobody's mentioned yet - if you're registered as an S-corp or LLC, the sourcing rules might interact differently with your business entity type. My CPA told me that certain pass-through entities have special considerations for foreign vs. domestic income classification. Might be worth considering how your business is structured before making final determinations. In my experience, a 30-minute consultation with a tax attorney who specializes in international business was worth every penny.

Has anyone mentioned Form 1116? If any portion of your income IS determined to be foreign-sourced, you might need this form to claim credit for any foreign taxes you've paid to avoid double taxation.

This thread has been incredibly helpful! I'm in a similar situation but with a twist - I buy vintage electronics from US estate sales and auctions, then sell them to collectors in Japan and Germany through online marketplaces like eBay and specialized forums. Like Anastasia, my contracts specify that ownership transfers when items leave my US shipping location, but I'm wondering if the fact that I'm using international shipping platforms changes anything about the sourcing determination. The platforms handle some of the payment processing and currency conversion, so I'm not sure if that creates any complications. Also, does anyone know if there are different considerations when you're selling collectibles versus regular retail products? The items I sell are often unique pieces, not mass-produced inventory, so I'm curious if the IRS has different rules for this type of business model.

I've been following this discussion closely since I'm dealing with a somewhat similar situation. I import handmade crafts from artisans in Mexico and Guatemala, then sell them at craft fairs and farmers markets here in California. What's interesting about this thread is how consistent everyone's advice has been about the title transfer rule. My tax preparer told me the same thing - it's all about where legal ownership passes to the buyer, not where the goods originated or where payments come from. One thing I'd add for anyone in similar situations: keep really detailed records of your contracts and shipping documentation. The IRS wants to see clear evidence of where title transfers, especially if your business grows and you get audited. I learned this the hard way when I had to reconstruct my records for last year's return because I hadn't been documenting the transfer terms properly. @Anastasia - based on everything discussed here, it sounds like you're in good shape with your contracts specifying title transfer in the US. That should make your sourcing determination pretty straightforward for tax purposes.