This article is for informational purposes only and does not constitute tax, legal, or accounting advice. Consult a qualified tax professional before making compliance decisions.

Policy

The MTC Just Wrote the States a Manual for Taxing AI Agents Without Violating Federal Law

Beardsley Rumble|2026-07-27|7 min read

On July 22, 2026, the Multistate Tax Commission's Digital Products Work Group posted a draft white paper section on the Internet Tax Freedom Act, five days before the Commission's 59th Annual Meeting opened in Detroit. It is the clearest public statement yet of how the states intend to write digital tax laws that survive federal challenge. For anyone building on the assumption that the ITFA is a shield against AI agent sales tax, the draft and the one case squarely on point point the other way.

What the Document Is

The MTC's Digital Products Work Group was convened to produce a white paper on what states should consider when adding digital products to a sales tax base — with "digital product" defined for the project to mean both goods and services. Meetings are suspended while section drafts circulate. Three are now public: Mixed and Bundled Transactions (April 28), Introduction and Purpose (July 15), and Federal Law/ITFA (July 22). Sourcing, exemptions, imposition, and alternative taxes remain outstanding.

One caveat up front: this is a draft, not adopted policy, and it notes that the work group "has not formally considered the ITFA." MTC uniformity output is advisory, and states adopt or ignore it. But these drafts have a long history of becoming statutory language, and this one is circulating in the week the Commission's committees meet.

The Comparison Axis Is the Internet, Not the Technology

The ITFA bars states from taxing Internet access and from imposing "multiple or discriminatory taxes on electronic commerce." Everything turns on two federal definitions. "Electronic commerce" is a transaction conducted over the Internet or through Internet access. A "discriminatory tax" is one imposed on electronic commerce but not imposed, or not imposed at the same rate, on "similar property, goods, services, or information accomplished through other means."

The draft is blunt about what that structure does not reach:

The ITFA does not prohibit discrimination between transactions in electronic commerce.

A state may tax one Internet-delivered product and exempt another, freely, for whatever reason it likes. The federal comparison runs between Internet and non-Internet — never between two things both sold online, and never between digital and physical as such. The draft says so directly: a tax on physical property imposed only when that property is sold over the Internet would violate the ITFA, while taxing a digital product itself would not.

That distinction is the whole ballgame, and it is where the most common intuition in this industry breaks.

ADP v. Arizona: Automation Is a Business Model, Not the Internet

The draft cites one case for the proposition, and it is the case agent operators should read.

ADP provided Maricopa County access to its eTime human-resources software; Arizona applied its Transaction Privilege Tax. ADP argued the TPT discriminated under the ITFA because the state was taxing an online service that would not have been taxable in the pre-Internet way of doing the same work — when the tasks were performed manually rather than by software. The Arizona Court of Appeals rejected the claim, holding that the change in taxation followed from the automation of ADP's work, not from the use of the Internet. The MTC draft summarizes the holding the same way: "the distinction was the taxpayer's business model rather than the presence or absence of the Internet." The Arizona Supreme Court declined review, leaving the decision in place (ADP, LLC v. Arizona Dep't of Revenue, No. 1 CA-TX 21-0009 (Ariz. Ct. App. Jan. 31, 2023); MTC draft citing 524 P.3d 278, 286).

Translate that into agent terms. The argument "my agent performs work a human employee used to perform, and that human's labor was never subject to sales tax" is not an ITFA argument. It is a description of a business model, and under the only authority the MTC could find on point, it loses. A state that taxes an automated research service while exempting a human researcher's fee is drawing a line between automation and labor, not between the Internet and other means — and the ITFA does not police that line. That comparison is the instinctive one for agent builders. It feels like exactly the unfairness a federal non-discrimination statute ought to address. It is not the kind this one addresses.

Where the Federal Hook Actually Sits

None of this makes the ITFA irrelevant. It relocates it.

We have flagged before that a tax whose base names an operator's architecture — "machine learning algorithms," "computing power" — invites ITFA scrutiny. The MTC's framework requires a more careful statement of that point. Naming machine learning is not itself the federal hook, because machine learning is a non-Internet characteristic, and under ADP's reasoning a state may key tax treatment to how a service is produced. The hook is the comparison. Where a state taxes digital advertising and leaves comparable non-digital advertising untaxed, or taxes an electronically delivered product while exempting the same product delivered by other means, the disparity runs along the Internet axis and the ITFA question is live. Maryland's digital advertising tax has been the most visible test; see the Maryland Comptroller's guidance for the imposition itself, which reaches only very large platforms and will not apply to most agent businesses.

So: read the base, and ask what the untaxed comparator is. If it is a human doing the work, there is no federal argument. If it is the same thing sold off the Internet, there may be.

The draft is candid that the load-bearing term is undefined. "Similar" has no statutory content, no federal agency has authority to issue guidance under the ITFA, and the only binding interpretation comes from litigation. The MTC's own analytic chart calls identifying a similar non-Internet product "the most challenging analytical step" and expects it to be the significant point in most cases. That question is unresolved, and we are not going to characterize it as anything else.

Two Provisions That Do Less Than Their Names Suggest

The multiple-tax bar does not reach agent-chain pyramiding. That provision addresses one state taxing the same or essentially the same electronic commerce that another state also taxes, without a credit. It is a cross-border double-tax rule. It says nothing about a multi-tier pipeline in which Agent A sells to Agent B sells to Agent C and each leg is independently taxable within a single state — that is tax pyramiding, a different problem, and no federal statute solves it. Resale certificates and B2B exemption analysis remain the tools. Whether states will address multi-tier digital transactions at all is still open.

The Internet access bar has a bundling escape hatch conditioned on your records. The ITFA's accounting rule lets a state tax a bundled charge that includes Internet access, unless the taxpayer can reasonably identify the Internet access portion from books and records kept in the ordinary course. Courts have called that standard lenient — historical usage patterns have sufficed. If your offering bundles connectivity, the protection is real, but it rests on your bookkeeping rather than on the statute.

What the MTC Is Telling States

The recommendations section reads as drafting advice, and agent operators should read it as such:

Broad-based taxes are less likely to draw a discrimination challenge, because if everything is taxed there is less room for disparate treatment.

States should avoid basing tax treatment on the presence or use of the Internet, and should be careful with language that invites that reading. A treatment resting on non-Internet characteristics "will likely survive an ITFA discrimination challenge."

States should not incorporate the ITFA into their own statutes, because doing so can only expand the preemption beyond what federal law requires and risks divergent interpretations.

The draft does acknowledge the statute's teeth: there is no intentionality requirement and no de minimis exclusion, so even trivial inadvertent discrimination can invalidate a tax. But the through-line is unmistakable. This is a manual for writing digital tax laws — including laws that reach AI agent services — that cannot be challenged on federal grounds.

What Agent Operators Should Do

Stop treating the ITFA as contingency planning. If your posture assumes a federal argument in reserve, price that assumption near zero unless your facts involve a same-product, non-Internet comparator taxed more favorably.

When a new state tax lands, identify the untaxed comparator first. Automation versus human labor is not an ITFA question. Electronically delivered versus otherwise delivered is.

Keep unbundling records if you bundle connectivity. The accounting-rule protection depends on decisions you make before an audit, not during one.

Do not expect federal law to solve pyramiding. Multi-tier chains need certificates and B2B analysis, not the multiple-tax provision.

What to Watch

The Commission's committees meet in Detroit through July 30, and the remaining white paper sections — sourcing, exemptions, imposition, alternative taxes — are the ones most likely to touch how an agent transaction gets located and classified. The Streamlined Sales Tax Governing Board's tabled Section 805 amendment, which would excuse member-state noncompliance compelled by federal law, is worth tracking if the ITFA starts forcing exemptions. And the development that would change this analysis outright is model language from the MTC or the Governing Board naming artificial intelligence or automated services as a category of its own. Nothing released so far does.

AgentTax classifies what your agents sell and flags where the character of a transaction drives the tax result — state by state, on the transaction itself. Federal preemption is not going to do that work for you, which is why classification is the question worth getting right now. See how it works at agenttax.io.

This analysis is for informational purposes only and does not constitute legal or tax advice. This post reflects AgentTax's current interpretation of evolving law. Consult a licensed tax professional for compliance decisions.