Washington Law Review


Logan S. Weaver


The United States has two different rationales for taxing income of non-U.S. persons and entities. First, the income may be “sourced” to the United States, as defined in the Internal Revenue Code. Alternatively, the income may be effectively connected to a trade or business within the United States that provides income to the non-U.S. person or entity. The sourcing rules for income of non-U.S. persons and entities depend heavily on the nature of the underlying transaction and the geographical location where certain key elements of the transaction take place. So long as the non-U.S. person or entity avoids activities that constitute a trade or business within the United States under the Internal Revenue Code, precluding taxable effectively connected income, even significant revenue streams may escape taxation by the United States. With the rise of new models of digital transactions, companies may structure their business operations to limit or avoid U.S. taxation. Twenty years ago, the Department of the Treasury developed regulations governing computer transactions. Since then, new mechanisms for digital deliveries have developed, including the cloud computing products. These products—software-as-a-service (SaaS), platform-as-aservice (PaaS), and infrastructure-as-a-service (IaaS)—have sprouted, rooted, and blossomed into an expansive and profitable industry. This Comment summarizes the landscape of cloud taxation, reviews different ways to frame cloud transactions under current law, and advocates for new federal action to ensure income does not escape taxation by virtue of the underlying transaction’s technological form.

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