The MTC Digital Products Project: ABA SALT Committee Urges Caution in May 2025 Report

In its May 2025 Vice Chair Report, the ABA State and Local Tax (SALT) Committee raised serious concerns with the Multistate Tax Commission’s (MTC) ongoing Digital Products Project. While the project aims to provide a uniform definition of “automated digital products” for sales tax purposes, the ABA Task Force recommends further analysis before states move forward with implementation.

🔍 Background: MTC’s Goal

The MTC’s Definition Study Group is crafting a model statute defining “automated digital products” that states could adopt to expand their sales and use tax base. The working definition includes software, services, or digital rights delivered in binary format with minimal human intervention. A related business-use exemption is also proposed.

⚖️ ABA Task Force: Our Role Is Guidance, Not Endorsement

The Task Force emphasizes that it does not support or oppose expanding the sales tax base. Its purpose is to guide drafters by identifying unintended consequences and legal vulnerabilities in the current proposal.

🚩 Key Concerns Identified

1. Vague Language: Terms like “binary format” and “minimal human intervention” are undefined and impractical for real-world application.
2. ITFA Preemption Ignored: The Internet Tax Freedom Act (ITFA) prohibits taxation of certain digital services, yet the MTC proposal provides no statutory allowance for federal preemption—only vague references to guidance.
3. No Plan for Implementation: Unlike international efforts, the MTC framework lacks transitional or administrative infrastructure, potentially creating chaos for both taxpayers and state agencies.

📄 The Draft Definition

The MTC’s proposed statutory language defines an “automated digital product” as a software or service offered in a binary format that can be replicated with little human effort. A business-use exemption applies if the product is used predominantly in a trade or business. The goal is to reduce pyramiding, but states would require customers to self-certify exempt use.

🧩 Administrative Complexity and Bundling Problems

The ABA warns that bundling rules will need serious revision. For instance, a single transaction involving both automated and non-automated services could lead to unintentional taxability unless state law clearly distinguishes them. Further, there are sourcing and exemption documentation concerns that remain unaddressed.

🌐 International Frameworks as References

The proposal borrows language from the UN Model Convention and OECD’s Pillar One Blueprint. However, these frameworks assume greater administrative coordination than currently exists among U.S. states.

🔮 Future-Proofing or Future Problems?

While the definition could potentially grow the sales tax base—especially with AI-driven services—it also opens the door to misclassification and litigation. As AI accelerates automation, the line between “minimal human effort” and traditional services may blur even further.

✅ Final Recommendation

The ABA SALT Committee recommends continued monitoring of the MTC’s efforts. It suggests that states should not adopt the definition until fundamental questions around preemption, administrability, and interpretability are addressed.