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Cloud Computing Tax Rules Need Changes, Industry Groups Say

Nov. 12, 2019, 10:00 PM

An IRS proposal to change how companies source cloud computing transactions is ambiguous and burdensome, industry groups said.

Proposed regulations (REG-130700-14) under tax code Section 861 update existing rules on classifying transactions under Section 861-18, which were introduced in 1998 and updated in July. The regulations also introduce Section 861-19, which guides companies in determining whether to classify their cloud transactions and digital content access as a provision of services or a lease of property.

Cloud computing allows buyers to use a network of remote servers hosted on the internet to store, manage, and process data. The proposed rules require companies to source the sales of copyrighted articles by first looking to a user’s location of download or installation. If that information isn’t available, then the company must look to the customer’s billing address.

But groups, including the Software Finance and Tax Executives Council, are urging that companies be able to use either approach.

“Requiring taxpayers to collect new data solely for tax purposes creates substantial and burdensome systems and data storage costs,” the Tax Executives Institute said in a Nov. 12 letter.

Tracking a customer’s location at the time of download would also interfere with data privacy laws, the Information Technology Industry Council said.

The groups and the New York State Bar Association Tax Section are also seeking an expanded definition of “digital content” to include non-copyrighted content in upcoming final cloud computing tax rules. In its Nov. 12 letter, the bar group cited U.S. federal court decisions, food recipes, and fonts as examples of non-copyrighted content.

Section 861-18 defines “digital content” as computer programs, audiobooks, movies, and music that are currently copyrighted or no longer protected by copyright because of the passage of time. Expanding the rules would mean non-copyrighted content like user data—a valuable asset that is sometimes sold to third parties—could come under the scope of the rules.

To contact the reporters on this story: Sony Kassam in Washington at; Siri Bulusu in Washington at

To contact the editors responsible for this story: Meg Shreve at; Kathy Larsen at