I'm from Singapore and through the internet, i had incorporated a
limited liability company(LLC) in Delaware. I also have a checking
account with a Delaware bank.

The question now is i would like to apply for a internet merchant
account through my LLC for processing credit cards. (this helps to cut
cost and fees by a huge margin compared to "international merchant"
rates)

Because this LLC only plays a passive role in this case, will there be
any tax effects for money flowing through it's internet merchant
account?

(this LLC is only used for setting up of the internet merchant account
with the bank. It does not actually do any business or sells anything)

Hello and thank you for your question.

As you may know, the US federal system means that you need to consider
your obligations to two governments - - that of the United States
(i.e. the federal government) and that of Delaware.

For Delaware, as you do not conduct a trade or business in Delaware,
you are exempt from filing any Delaware income tax return.  There is
an annual franchise fee for maintaining the Delaware LLC - - perhaps
the agency that you used to organize the LLC is paying that on your
behalf as part of its service to you, or else you can pay directly at
the following site:
Delaware e-corp online filing
https://ecorp1.state.de.us/default.sph/ecorpWeb.class/secure/LoginLC.jsp

For the IRS, which collects tax on behalf of the federal government,
the answer is the same EXCEPT you will need to take further steps to
establish that your LLC indeed is not engaged in a US trade or
business.  This is done via Form W-8BEN which you file not with the
IRS but rather with the company with whom you have contracted for the
merchant account, and with any bank, etc. where your LLC maintains an
account.
Instructions for Form W-8BEN
http://www.irs.gov/formspubs/page/0,,id%3D10755,00.html
Form W-8BEN
http://www.irs.gov/pub/irs-fill/fw8ben.pdf
http://www.irs.gov/pub/irs-pdf/fw8ben.pdf

Because you are the sole owner of the LLC, it is a 'disregarded
entity.'  That means that you use your own personal tax identification
number when filling out Form W-8BEN.  If you do not have such a
number, you will need to obtain an ITIN as set forth below:
http://www.irs.gov/pub/irs-fill/fw7.pdf

Also, if your entity earns non-business income in the US, for example
interest on bank deposits, the payor will rely on Form W-8BEN and will
withhold US tax at a 30% rate.  That is why no further income tax
reporting will be required by you or your LLC.

In summary, as long as your entity is not engaged in a US trade or
business, neither you nor it have any income tax filing obligations. 
But you will need to inform US entities that you deal with of that
fact, so that they can withhold tax on any income that your entity
earns on its bank deposits.

Sincerely,
Google Answers Researcher 
Richard-ga

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Clarification of Answer by richard-ga on 27 Mar 2003 07:21 PST

I neglected to list the search terms used in formulating my answer:

withholding foreign llc "disregarded entity" 
foreign llc "disregarded entity" 
W-8BEN
http://answers.google.com/answers/main?cmd=search&q=delaware+llc+tax&qtype=all

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Request for Answer Clarification by lq-ga on 28 Mar 2003 06:24 PST

Hi Richard 

Thanks for your detailed reply. =)

I would just like to clarify in simpler terms.

Let's say i sell my products to US through the internet using my
Singapore company. However payment to my Singapore company is actually
done through the Delaware LLC's merchant account.

Will my Delaware LLC be liable for any taxes for funds that goes
through it's merchant/bank account?

I would really appreciate your help. =)

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Clarification of Answer by richard-ga on 28 Mar 2003 07:44 PST

Hello again:

Here's a streamlined version of my answer:

    If your Singapore company has no business presence in the US, it
has no US taxes to pay.  The answer might be different, for example,
if your Singapore company had a warehouse in the US.  But absent those
sorts of contacts, the question really is whether the activities of
its Delaware LLC are themselves sufficient to consitute a trade or
business/permanent establishment in the US.

    So the key question here is whether the Delaware LLC's maintenance
of the merchant account in the US is substantial enough activity in
the US for that activity itself constitutes 'engaging in trade or
business in the US' or in other terms constitutes a 'permanent
establishment' of the Delaware LLC in the US.  I believe the answer is
'no' which means that no income tax is due by either the Delaware LLC
or its foreign owner (you).  I say 'believe' because it is a question
of fact related to the level of activity that takes place in the US. 
By way of illustration, here is a company that makes its living
advising other companies what they can and cannot do in a state so as
to avoid crossing the line into taxability.
http://www.rsmmcgladrey.com/Services/Detail/salt_multistate.html 

     Finally, I mentioned Form W-8BEN because I assume that the credit
card company that your Delaware LLC contracts with will require such a
form for its files.  The practical answer to your question may be the
credit card company's willingness to credit your Singapore account for
funds received without withholding 30% of receipts for the IRS.  I
anticipate that they will not do so but that is a question you should
ask of them.

Sincerely,
Richard-ga

Very detailed research. Good Work!