Candice Horbacz
Under legislation currently advancing through the Utah State Legislature, the state proposes to impose a tax on "targeted advertising" that is purchased through a bidding process and served based on individual data profiles. This legislative initiative, encapsulated in Senate Bill 287 (SB 287), meticulously avoids the contentious phrase "digital advertising," a linguistic strategy aimed at navigating the complex legal landscape that has ensnared similar efforts in other states, most notably Maryland. However, legal experts and tax policy analysts widely contend that this semantic distinction is unlikely to shield Utah from the same protracted legal challenges and constitutional questions that have plagued its predecessors, primarily due to the federal Internet Tax Freedom Act (ITFA).
The Troubled Precedent: Maryland’s Digital Advertising Tax
Utah’s legislative maneuver comes nearly five years after Maryland became the first, and to date, only U.S. state to implement a tax on digital advertising. Adopted in 2021, Maryland’s pioneering tax immediately sparked a fierce legal battle, drawing challenges to its legality and constitutionality from major industry players and business associations. The legal saga began with a significant setback for Maryland when a lower court ruled the tax to be in violation of the federal Internet Tax Freedom Act, as well as several clauses of the U.S. Constitution, including the Commerce Clause and the First and Fourteenth Amendments. This ruling underscored the profound legal vulnerabilities inherent in state-level digital advertising taxes.
While the Maryland Supreme Court later overturned the lower court’s decision on procedural grounds, remanding the case to the Maryland Tax Court, the core constitutional and statutory challenges remain unresolved. The Maryland Tax Court is expected to hear arguments on the critical Internet Tax Freedom Act and Commerce Clause challenges sometime in the current year, a decision eagerly awaited by states like Utah considering similar revenue-generating measures. This ongoing litigation in Maryland has served as a significant deterrent, with most state lawmakers nationwide opting to postpone their own digital advertising tax proposals, preferring to await a definitive legal outcome rather than expose their states to potentially costly and lengthy legal battles that they appear likely to lose. The consensus among legal observers is that the Internet Tax Freedom Act presents a formidable impediment to such taxes.
The Internet Tax Freedom Act (ITFA): A Federal Barrier
At the heart of the legal debate is the Internet Tax Freedom Act, a federal statute originally enacted in 1998 and later made permanent. ITFA’s primary objective is to foster the growth of electronic commerce by prohibiting discriminatory taxes on internet access and other forms of electronic commerce. Specifically, it disallows taxes that are unique to or disproportionately target online activities, creating a level playing field between traditional and digital economic transactions. Most legal scholars and tax policy experts interpret ITFA as directly prohibiting taxes that exclusively target digital advertising, arguing that such taxes inherently discriminate against e-commerce.
Proponents of digital advertising taxes have attempted to craft creative arguments suggesting that a tax exclusively on digital advertising does not, in fact, discriminate against e-commerce and therefore falls outside ITFA’s prohibitive scope. These arguments often center on the idea that digital advertising is a distinct service rather than a component of electronic commerce itself. However, these interpretations have largely failed to gain traction among a broader spectrum of lawmakers and legal professionals, who generally recognize ITFA as a major, if not insurmountable, obstacle to this class of state-level taxes. Utah’s SB 287, by attempting to rebrand "digital advertising" as "targeted advertising," appears to be a direct response to this federal constraint, an effort to find a linguistic loophole around ITFA’s clear intent.
Utah’s Semantic Strategy: Substance Over Form
Utah’s Senate Bill 287 defines taxable "targeted advertising" as advertising purchased through a bidding process and served based on individualized data profiles. The legislation pointedly omits any explicit mention of "digital" platforms or "electronic" commerce. The underlying rationale for this approach is that if Utah were to tax a broad spectrum of advertising, regardless of its medium (digital, print, broadcast), the proposal might still face constitutional questions but would not necessarily be preempted by ITFA, which specifically targets discriminatory taxes on electronic commerce.
However, a close examination of SB 287 reveals that its carefully constructed definition of "targeted advertising" inherently describes modern digital advertising models. The use of a bidding process, the reliance on individual data profiles for ad serving, and the dynamic nature of such placements are hallmarks almost exclusively found in online advertising ecosystems operated by major digital platforms. Legal analysis suggests that the bill, despite its artful language, does not, in practice, tax anything other than digital advertising. This presents a critical problem under ITFA, regardless of how meticulously the legislative language is crafted.
The bill employs a legislative technique sometimes referred to as "bracketed language," which involves describing a category so narrowly that it effectively creates a "closed class of one." This technique is more commonly seen in attempts to circumvent state constitutional restrictions on "special legislation" designed to benefit or target a specific jurisdiction or entity. For instance, a law might describe "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." If such a description, in reality, only applies to a single county, courts often strike down the law if it would have been impermissible had it simply named that county directly.
Federal courts, which prioritize the substance of a law over its form or superficial wording, would likely apply a similar scrutiny to SB 287. They would seek to determine whether the class of advertising defined by the bill is, in practice, a closed class that excludes everything except digital advertising. If the judiciary concludes that the tax, despite its phrasing, applies only to digital advertising, it will evaluate the law under ITFA precisely as if it were explicitly titled a "digital advertising tax." This "obvious conclusion" is reinforced by the bill’s definition, which precisely mirrors the operational mechanics of contemporary digital ad ecosystems.
Broader Constitutional Challenges: The Commerce Clause and Beyond
Beyond the immediate hurdle of the Internet Tax Freedom Act, Utah’s proposed tax raises significant questions under the U.S. Constitution’s Commerce Clause. The Commerce Clause, specifically its "dormant" aspect, limits states’ abilities to enact laws that unduly burden or discriminate against interstate commerce. One prominent concern within SB 287 is its use of a liability threshold that is based, in part, on a digital platform’s gross worldwide advertising revenues. This provision implies that a platform’s taxability in Utah could be influenced by advertising transactions occurring entirely outside of Utah’s borders, in other states or even other countries.
Such an extraterritorial application of a state’s tax authority is a classic trigger for Commerce Clause challenges. It raises concerns about fair apportionment (how much of a company’s revenue can reasonably be attributed to activities within the taxing state), the risk of multiple taxation (where different states could claim the right to tax the same revenue stream), and an undue burden on interstate commerce by forcing companies to comply with disparate and complex tax regimes based on global revenues. The Commerce Clause aims to prevent states from creating a "patchwork" of regulations that impede the free flow of goods and services across state lines.
Furthermore, the original lower court ruling in Maryland also cited violations of the First Amendment (freedom of speech) and the Fourteenth Amendment (equal protection). While commercial speech receives less protection than political speech, it is still protected, and a tax that disproportionately burdens certain forms of advertising could be challenged as infringing upon this right. Similarly, if a tax is found to target a specific industry or medium without a rational basis, it could face scrutiny under the Equal Protection Clause. These constitutional arguments represent additional layers of legal complexity that Utah would likely face if SB 287 were to become law.
Economic Impact: A Burden on Utah Businesses
While much of the discussion revolves around legal and constitutional complexities, the policy implications and economic impact of SB 287 are equally critical. Although large digital platforms would be responsible for collecting and remitting the tax, the economic burden of such a tax would largely fall on the businesses that pay to advertise in Utah. A significant portion of these advertisers are Utah-based businesses, ranging from small local shops to medium-sized enterprises, all relying on digital advertising to reach their potential customers within the state.
The principle here is akin to a sales tax: collected by retailers but ultimately borne by consumers. Similarly, a tax on advertising, an input cost for businesses, is typically passed on through higher prices for goods and services, reduced investment in marketing, or other operational adjustments. For Utah businesses, particularly small and medium-sized enterprises (SMEs) that depend heavily on cost-effective digital advertising to compete with larger entities and reach a targeted local customer base, this tax would represent an increase in their operational costs.
According to industry data, the U.S. digital advertising market reached an estimated $225 billion in 2023 and is projected to continue its robust growth. Businesses across all sectors allocate significant portions of their marketing budgets to digital channels due to their efficiency, measurable results, and unparalleled targeting capabilities. For a state like Utah, with a vibrant small business ecosystem, imposing an additional tax on this essential business function could hinder growth, reduce competitiveness, and ultimately translate into higher prices for Utah consumers. It could also disadvantage Utah businesses compared to those in states without such a tax, potentially driving advertising spend to platforms or methods not subject to the state’s tax.
Moreover, such taxes have the potential to fundamentally alter the economic models of many online services. Many platforms currently offer "free" features to users, subsidizing these services through advertising revenue. By making ad-supported models less profitable, a digital advertising tax could incentivize platforms to shift more currently free features into paid subscription services, ultimately impacting consumer choice and access to information.
The Broader Landscape of Digital Taxation and the Call for a Unified Approach
Utah’s proposed tax does not exist in a vacuum. It is part of a broader, global conversation about how to tax the increasingly digitalized economy. Internationally, organizations like the OECD (Organisation for Economic Co-operation and Development) and the G20 have been working for years to establish a multilateral, consensus-based solution for taxing large multinational enterprises, including digital giants. These efforts aim to prevent a fragmented landscape of unilateral digital services taxes, which create complexity, increase compliance costs, and risk trade disputes.
Within the United States, several states beyond Maryland and Utah have considered similar digital advertising taxes, including New York, Massachusetts, and Connecticut. However, the ongoing legal uncertainty stemming from Maryland’s case has largely put these initiatives on hold. The reluctance of most lawmakers to proceed highlights the significant legal risks and the potential for prolonged and expensive litigation that states are likely to face. The average cost of complex state tax litigation can run into millions of dollars, diverting state resources from other priorities.
Jared Walczak, a Senior Fellow at the Tax Foundation and president of Walczak Policy Consulting, has consistently articulated that while proponents of digital advertising taxes often frame them as a way to "make tech giants pay their fair share," the reality is that much of the burden ultimately cascades down to local businesses and consumers. He and other tax policy experts advocate for comprehensive tax reform that addresses the broader challenges of taxing a globalized, digital economy, rather than piecemeal, legally questionable taxes that create economic distortions and invite litigation.
Conclusion: A Risky Path Forward
Utah’s Senate Bill 287 represents an ambitious attempt to carve out a new revenue stream from the digital economy. However, by defining "targeted advertising" in a manner that exclusively captures digital ad models, the state appears to be heading down the same legally fraught path as Maryland. The strategic avoidance of the term "digital advertising" is unlikely to circumvent the federal Internet Tax Freedom Act or withstand scrutiny under the Commerce Clause and other constitutional provisions, as courts generally prioritize the substantive effect of a law over its linguistic presentation.
If enacted, SB 287 would almost certainly expose Utah to the same kind of costly and protracted legal battles that Maryland has been fighting for nearly five years, with an uncertain outcome. Beyond the legal quagmire, the tax would increase costs for Utah businesses, potentially stifling economic growth and innovation, and could impact the availability and pricing of ad-supported online services for consumers.
Instead of pursuing a legally perilous and economically burdensome path, a more prudent approach for states like Utah might involve advocating for a comprehensive, federal solution to taxing the digital economy, or awaiting the resolution of Maryland’s legal challenges to inform future policy. For now, Utah’s proposed "targeted advertising" tax stands as a testament to the ongoing struggle of states to adapt their tax codes to the realities of the 21st-century digital economy, a struggle that, in this instance, seems poised to lead to significant legal and economic friction.
