The Multistate Tax Commission (MTC) Workgroup issued a proposal on 23 January 2025 exploring the creation of a distinct tax classification for digital products.
The intention is to separate digital goods from traditional classifications like tangible personal property and services, simplifying taxing digital items that are hard to categorise as goods or services in the digital economy sector.
The MTC is an intergovernmental state tax agency whose mission is to promote uniform and consistent tax policy and administration among the states, assist taxpayers in achieving compliance with existing tax laws, and advocate for state and local sovereignty in tax policy development.
The main points of the proposal include:
Definition of automated digital product
- An automated digital product” is an item, including software and service, that is provided for noncommercial use in a binary format, and for which additional human intervention to produce a similar item for additional customers is minimal.
- An indicator of an “automated digital product” is the ability to scale up and provide the same type of product to new users with minimal human intervention.
- The definition of “automated digital product” would include some services preempted by the Internet Tax Freedom Act, and no allowance is made for the preemption.
Flexibility in delivery methods
The definition of “automated digital product” does not require that the product be delivered electronically or over the Internet or other electronic network. Delivery over the Internet should not be a criterion because it will further implicate the Internet Tax Freedom Act.
Alignment with international standards
The proposal aligns with principles from the United Nations, the OECD, and the European Union’s VAT system.
Reducing tax cascading
Preventing the taxation of business-to-business transactions by excluding them from the definition of an automated digital product.
Analysing bundling regulations
Leveraging the Streamlined Sales and Use Tax Agreement to address the growing complexity of digital product transactions and ensure a consistent approach across all states.
