The Taxation of Cloud Computing and Digital Content

37 Pages Posted: 3 Aug 2013

See all articles by David J. Shakow

David J. Shakow

University of Pennsylvania Law School

Date Written: July 18, 2013


“Cloud computing” raises important and difficult questions in state tax law, and for Federal taxes, particularly in the foreign tax area. As cloud computing solutions are adopted by businesses, items we view as tangible are transformed into digital products. In this article, I will describe the problems cloud computing poses for tax systems. I will show how current law is applied to cloud computing and will identify the difficulties current approaches face as they are applied to this developing technology. My primary interest is how Federal tax law applies to cloud computing, particularly as the new technology affects international transactions. I am not so interested in the current state of the law as I am in identifying the problems confronting tax administrators as technology creates a changed economic system. After identifying the problems, I will suggest that cloud computing (like other technological changes) is not always compatible with current rules for taxing activities in multiple jurisdictions. Therefore, tax fairness may require that new standards be used to allocate income among jurisdictions. But beyond that, I hope to explain some of the particulars of the cloud structure. In doing so, it will become apparent that the significance of cloud computing goes beyond the local and international tax areas that have been identified as problem areas in the past.

Keywords: State & federal taxation, Internet sales, taxing software in the cloud, hosting out-of-state servers, nexus, foreign income taxation, international transactions, income allocation among jurisdictions, defining a permanent establishment, collecting tax judgments in foreign court, int’l tax neutrality

JEL Classification: H25, H71, H87, K34, L86

Suggested Citation

Shakow, David J., The Taxation of Cloud Computing and Digital Content (July 18, 2013). Tax Notes, Vol. 140, No. 4, July, 22, 2013, Tax Notes International, Vol. 71, No. 4, July, 22, 2013, State Tax Notes, Vol. 69, No. 4, July 22, 2013, U of Penn, Inst for Law & Econ Research Paper No. 13-26, Available at SSRN:

David J. Shakow (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

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