Treasury and IRS Release Proposed Regulations on Cloud Computing and Digital Content Transactions: The Proposed Regulations Generally Would Extend Rules Applicable to Computer Programs to Other Digital Content, Provide Guidance for Classifying Cloud Transactions and Treat Sales of Downloaded Material Based on the User’s Location for U.S. Tax Purposes

Sullivan & Cromwell LLP - September 19, 2019
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On August 9, 2019, the Treasury Department and IRS released proposed regulations (the “Proposed Regulations”) under the U.S. Internal Revenue Code (the “Code”) that, if finalized, would provide guidance on the classification of cloud transactions and digital content transactions.  The classification of cloud and digital content transactions is not entirely clear under current law, which does not comprehensively address transactions in digital media or cloud transactions where no or minimal content is “transferred” to a user.  In general, the Proposed Regulations generally would confirm industry practice that cloud transactions are generally treated as the provision of services, and that current rules applicable to computer programs are extended to other digital media. Significantly, however, the Proposed Regulations would deem sales of downloaded content to occur based on the user’s location, increasing the importance for non-U.S. taxpayers selling to U.S. customers to determine whether such non-U.S. taxpayers might be treated as “engaged in a U.S. trade or business.”