Utah’s Digital Ad Tax, by Any Other Name, Is Just as Legally Fraught

Under legislation advancing in Utah, the state would taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. targeted advertising purchased through a bidding process and served based on individual data profiles—but please don’t call it digital advertising.

Maryland is currently the only state to impose a tax on digital advertising. That tax was adopted in 2021, and challenges to its legality and constitutionality are still working their way through the courts. A lower court ruled that the tax violated the federal Internet Tax Freedom Act and the US Constitution under the Commerce Clause and the First and Fourteenth Amendments, though the Maryland Supreme Court subsequently held that the case should have first been heard in the Maryland Tax Court. That court is expected to hear arguments on the Internet Tax Freedom Act and Commerce Clause challenges sometime this year.

The Internet Tax Freedom Act (IFTA) prohibits discriminatory taxes on electronic commerce. Most observers believe that digital advertising taxes, like the one imposed by Maryland and proposed elsewhere, violate this federal law. No state has yet followed Maryland’s lead, with most lawmakers preferring to wait for a final ruling in Maryland rather than subject their own state to costly and protracted litigation they seem likely to lose. While proponents of digital advertising taxes have advanced creative arguments for why a tax exclusively on digital advertising doesn’t actually discriminate against e-commerce and isn’t prohibited by IFTA, most lawmakers recognize that the federal law is a major impediment to this class of taxes.

Utah’s solution, it seems, is to avoid using the phrase “digital advertising,” instead levying a tax on “targeted advertising,” ostensibly agnostic to whether the advertising is electronic. And indeed, if Utah did choose to tax a broad range of advertising, the proposal might still raise constitutional questions, but it would not be preempted by ITFA.

Senate Bill 287, however, does not actually tax anything other than digital advertising. That’s a problem under ITFA, no matter how artful the legislative language.

The bill employs what is sometimes called “bracketed” legislative language, which is more commonly associated with efforts to get around state restrictions on special legislation to aid a particular jurisdiction or entity. Anyone who has read enough legislation will know the type: a county with a population of not more than 150,000 and not less than 140,000 as of the 2020 decennial census, which is designated not less than 40 percent rural and utilizes a council-manager form of government…

When such language creates a closed class of one, courts usually strike down the law if it would have been impermissible had it simply named a jurisdiction or entity rather than describing it. Similarly, federal courts, which prioritize substance over form, would seek to determine whether the class of advertising defined by SB 287 is a closed class that, in practice, excludes anything other than digital advertising. If the tax only applies to digital advertising, as would seem to be its aim, then the judiciary will evaluate it under ITFA exactly as if it were explicitly a tax on digital advertising.

And this would seem to be the obvious conclusion. The bill’s definition of taxable advertising—targeted advertising involving a bidding process and serving ads based on individualized data profiles—describes digital advertising models.

The legislation also raises questions under the Commerce Clause of the US Constitution. One concern, of several, is the use of a liability threshold based in part on gross worldwide advertising revenues, as this employs a factor unrelated to Utah in determining taxability. Ad platforms’ taxability in Utah would be influenced by ads run in other jurisdictions.

These are among the legal concerns. As a policy matter, it is also important to note that while large digital platforms would collect and remit the tax, much of the burden would fall on businesses paying to advertise in Utah—many of which are Utah-based. Just like the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.  is collected by retailers but ultimately borne by consumers, much of the burden of this tax on advertising in the state would be shouldered by Utah businesses using these platforms to advertise to their local customer base.

Taxing advertising on social media platforms won’t address any concerns lawmakers may have about how some people use or misuse social media. Instead, it will increase costs for Utah businesses advertising to their potential in-state customers. Such taxes, moreover, have the potential to shift more currently-free features to paid subscription services by rendering ad-supported models less profitable. And it will almost certainly expose Utah to the same protracted legal battle that Maryland has been fighting for nearly five years.

Share this article