The sale of a computer program—it seems simple.  But, as illustrated by the Treasury Regulations’ computer program characterization rules, the issue of just what a sale of computer program is can become confusing fast.

The Computer Program Characterization Regulations

Treasury Regulation § 1.861-18 provides rules for characterizing primarily cross-border transactions involving computer programs.[1]  For these purposes, a “computer program” means “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.”[2]  The term also includes certain items incidental to the operation of a computer program.[3]

In characterizing a transaction involving a computer program, neither general principles of copyright law nor the parties’ characterization of the transaction are determinative.[4]  For instance, it doesn’t matter if the parties label a transaction a license or payments as royalties if factors present in the transaction warrant a different treatment.[5]  The means by which the computer program is transferred also is irrelevant.[6]

Ultimately, there are six possible results from the application of the computer program characterization rules: 1) the sale or exchange of copyright in a computer program, 2) the license of a copyright in a computer program (generating royalties income), 3) the sale or exchange of a copy of a computer program, 4) the lease of a copy of a computer program, 5) the provision of services for the development/modification of a computer program; or 6) the provision of know-how relating to computer programming techniques.[7]

To get to these results, the regulations first require that we distinguish between the transfer of the copyright in a computer program versus the transfer of a copy of a computer program.[8]

A transaction is the transfer of a copyright right if the purchaser acquires any one of the following rights:

• the right to make copies of the computer program for purposes of public distribution;
• the right to prepare derivative computer programs based on the copyrighted computer program;
• the right to make a public performance of the computer program;
• the right to publicly display the computer program.[9]

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