Treasury And The Service Propose Regulations On Cloud And Digital Content Transactions

Background

On Aug. 14, 2019, the Department of the Treasury (Treasury) and the Internal Revenue Service (the Service) published proposed regulations (the Proposed Regulations) regarding the classification of “cloud transactions” for purposes of the international provisions of the Internal Revenue Code of 1986, as amended (the Code). The Proposed Regulations would also modify current regulations regarding the classification of certain transactions involving computer programs, including by making such rules applicable more broadly to transactions involving “digital content” and stipulating the location of sales involving nonphysical transfers of digital content.

The Proposed Regulations are significant inasmuch as they would delineate rules classifying items of income with respect to an entire universe of transactions that simply did not exist a relatively short time ago but are now increasingly prevalent. Such classification rules will enable taxpayers to determine,