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Individual Asks If Cloud Transaction Covers Advertising Business Model

AUG. 16, 2019

Individual Asks If Cloud Transaction Covers Advertising Business Model

DATED AUG. 16, 2019
DOCUMENT ATTRIBUTES
  • Authors
    Kadet, Jeffery M.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-32034
  • Tax Analysts Electronic Citation
    2019 TNTF 162-25

From: Poms, Douglas
Sent: Friday, August 16, 2019 8:23 AM
To: Byrd, Kimberly
Subject: FW: New Proposed Cloud Transaction Regs

For FOIA. Thanks.


From: Jeffery Kadet <jeffkadet@gmail.com>
Sent: Friday, August 16, 2019 12:22 AM
To: Poms, Douglas <Douglas.Poms@treasury.gov>
Subject: New Proposed Cloud Transaction Regs

Hi Doug, I hope that you and your family have been having a good summer. My wife and I sadly lost most of July due to catching a bad chest cold that had us out of action for much of the month. We're now trying to make up for lost time building up some mileage on our bicycles since we'll be doing a two-day ride later this month to Vancouver. We'll spend a few days there seeing some relatives who are flying in from Singapore and then we'll pedal back to Seattle. After that, if we're lucky, we'll head to France in early September for a couple months on the road. We've been doing self-contained bicycle touring for almost all vacations since 1983. Since the mid-1990s much of that has been in France.

In the past week, I read recently released REG-130700-14 that covers cloud transactions and digital content. I think it's great and well done. I've drafted a letter with a few comments and have sent it to my old colleague for his input before we finalize it and submit it. One thing occurred to me that I wanted to ask about. If you're able to correspond on this, that would be great. If not, I'll of course live, so not a problem.

The definition of "cloud transaction” in Prop Reg §1.861-19(b) covers a lot of the businesses that we see on the web. What it doesn't clearly cover (at least as I read it) is an advertising business model such as Google and Facebook use where the end-users obtain “free” services and the advertisers pay for access to those end-users.

Consistent with Prop Reg §1.861-19(b) not covering the advertising business model are the 11 examples in Prop Reg §1.861-19(d). Some of these examples obviously cover well-known providers. For example, Example 3 is website hosting and applies to companies like GoDaddy and Wordpress. Example 4 involves online business software. There are many of them, one of which is Slack, a team collaboration tool. Example 6 is Microsoft Office (Word, Excel and Powerpoint). Example 8 involving data storage reflects majors like Microsoft, Apple, and Amazon, all of which sell data storage services as backup for users. Example 9 is the streaming of music, TV, and movies. This includes Apple Music, Spotify, Netflix, Hulu, and others.

It's pretty obvious that there's no example that relates at all to an advertising business model.

Doug, it seems clear to me that it was intentional to not cover the advertising business model in Prop Reg §1.861-19 . . . though maybe I'm wrong on this. My question is why wasn't this advertising business model covered? Does Treasury and the IRS consider it so obvious that this model generates services income that it is not necessary to cover it in this proposed regulation? Frankly, I think that it is obvious, but I have had arguments in the past with my old colleague who disagrees with me. He's not sure how to classify such income, but he's not comfortable saying that it's a simple service that ought to be covered by Reg §1.861-4.

I look forward to hearing back, even if it is to say that you can't comment.

Keep well.

Jeff

DOCUMENT ATTRIBUTES
  • Authors
    Kadet, Jeffery M.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-32034
  • Tax Analysts Electronic Citation
    2019 TNTF 162-25
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