I'm Canadian selling physical products on Amazon.com (US) I'm not sure about US taxes. I've heard that I just pay tax in Canada on the income/expenses earned in the US. Income approximately $40K CAD, expenses $70k CAD. Also would now be the time to incorporate or wait till a specific dollar differential? And incorporate in Canada or the US?
Regarding US taxation of internet sales.
Since you are a foreign entity or person (in regard to the US), and there is an income tax treaty between Canada and the US, you will not be liable for US federal income tax on internet sales unless you have a “permanent establishment” in the US with which the internet sales income is effectively connected. So as long as you do not have a warehouse, physical store, sales office, etc... in the US you don't have to file US returns or remit tax to the US. Amazon should be charging to the customer and withholding any sales tax due to a state in which your products are sold. If you sell through other merchants or directly you may have to deal with this yourself.
Incorporation is almost always a good idea from a liability standpoint as it prevents a judgement for damages from taking all your property and limits the collection to what is owned by the business, With the facts you have given I would suggest incorporating in Canada unless you have a business reason to establish a physical presence in the US. This will eliminate US taxes and related compliance costs. Once you establish a US presence you will need to begin filing returns in the US even if you are running a net operating loss. If there is no benefit to having a physical presence in the US then the related compliance costs and tax would be an unnecessary expense.
Feel free to setup a phone call if you would like to chat for a bit regarding the matter.
What you've heard is correct not only don't you need to pay US taxes forming a US entity would actually increase your overall tax rate as you'd need to pay taxes at the higher US tax rate and then in Canada personally.
You'll almost certainly want to incorporate in your local province in Canada but probably not earn profits there initially though this depends on your tax bracket as you can end up with double taxation. At some stage you'll be better off keeping the profits in the company at the low small business tax rate and reinvesting it from there so it can compound at a preferred rate rather than taking it personally and having less to invest.
As you grow you may reach a point where it makes sense to move part or all of the company international and gain cost advantages that way.
Feel free to contact me if you'd like to discuss further.