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Proposed Regulations Classify Cloud and Digital Content Transactions

Transactions involving digital content and cloud computing  have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Digital Content Transactions

Existing Regulation Section 1.861-18 provides rules for classifying transactions involving computer programs. The proposed regulations broaden the scope of the rules to apply to all transfers of digital content. “Digital content” is defined as any content in digital format that is either protected by copyright law or is no longer protected due solely to the passage of time.

The proposed regulations clarify that a transfer of the mere right to public performance or display of digital content for advertising does not alone constitute a transfer of a copyright.

Additionally, the proposed regulations clarify the title passage rule. When there is a sale of a copyrighted article through an electronic medium, the sale will occur at the location of the download or installation onto the end user’s device, or, in the absence of that information, the location of the customer.

A sale of personal property occurs at the place where the rights, title, and interest of the seller in the property are transferred to the buyer. If bare legal title is retained by the seller, the sale occurs where beneficial ownership passes.

Cloud Computing Transactions

Cloud computing transactions are typically characterized by on-demand network access to computer resources. The proposed regulations classify a “cloud transaction” as either:

  • a lease of property (i.e., computer hardware, digital content, or other similar resources); or
  • a provision of services.

The proposed regulations provide a nonexhaustive list of factors for determining how a cloud transaction  is classified. In general, application of the relevant factors will result in a transaction being treated as a provision of services, rather than a lease of property. The factors include both statutory factors under

Internal Revenue Code Section 7701(e)(1) and factors applied by the courts.

For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES (844.494.6337).
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