IRS released proposed regulations that changed the term Computer Programs to Digital Content and added guidance on Cloud Transactions.
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September 26, 2019 

IRS Regulations Regarding Cloud and Digital Content Transactions

Hi There!,

It has been over 20 years since the regulations addressed classification of transactions involving the sale or use of computer programs.  Transaction classifications and source of income are important because they determine how and when income might be recognized, whether a transaction is subject to tax in a particular jurisdiction and what type of reporting might be needed.  Transactions are normally broken down into the following four areas:

  1. Sales,
  2. Leases (rental income),
  3. Licenses (royalties-possible withholding taxes when cross border), and
  4. Provision of services.

The old regulations purposely avoided certain technology areas because they were not sure how to do this.  The IRS just released proposed regulations that changed the term “Computer Programs” to “Digital Content” and added guidance on “Cloud Transactions”. 

Digital Content

The proposed regulations modify the old regulations that mainly discussed the use of computer programs in some manner.  The expanded area now encompasses more than just software and considers the new ways that electronic-commerce occurs with movies, music and games.

Click for a chart on the Classification of Transactions Involving Digital Content

Digital Content is defined to mean:

A computer program or any other content in digital format that is either protected by copyright law or no longer protected by copyright law solely due to the passage of time, whether or not the content is transferred in a physical medium.

This copyright requirement is interesting because there may be many digital content transactions that do not involve copyrighted content, so how should these be treated?  The IRS has requested comments on this issue.

The proposed regulations have changed some of the results from the prior rules under which taxpayers were operating.  One provision on the transfer of copyright articles specifically states that the right to publicly perform or display digital content for the purpose of advertising the sale of the digital content should not constitute the transfer of a copyright right.

Cloud Transactions

There are only two classifications for Cloud Transactions:  Lease of Property and Provision of Services.  Cloud Transactions are defined as follows:

A transaction through which a person obtains on-demand network access to computer hardware, digital content or other similar resources, other than on-demand network access that is de minimis taking in to account the overall arrangement.

The regulations consider that most of these transactions will fall under the Provision of Services classification, but the determination will not be based upon a single factor.  Therefore, each Cloud Transaction must be analyzed based upon its facts.  Interestingly, the regulations do not address the issue of the source, although they mention it parenthetically.  For Digital Content transactions, there are other sources of guidance on the sourcing issue.  For Cloud Transactions, it is much more difficult because of the intangibles and often multiple locations of the intangibles that are involved in these types of transactions.


There are three new examples under the Digital Content regulations and eleven under the new Cloud Transaction regulations.  A typical situation where movies or music can be accessed by a customer are covered under several different examples.  The customer often has three options:  live streaming, renting for a period of time and buying.  In these situations, the results would be as follows:

IRS regs chart 9-25-19

These changes will impact both US based companies as well as foreign corporations doing business with US customers that deal with revenue streams involving digital content and cloud transactions.  While treaties might protect certain foreign corporations, they should determine if this means that a Form 8833 will need to be filed (along with the Form 1120-F) that was not required in the past.  MSDM can assist in this analysis.



James J. Miesowicz, CPA
+1 (248) 244-3115

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