Candice Horbacz
Utah is poised to become the second U.S. state to implement a tax on certain forms of digital advertising, following the contentious path blazed by Maryland. Under Senate Bill 287 (SB 287), currently progressing through the state legislature, Utah proposes to levy a tax on "targeted advertising" that is acquired through a bidding process and delivered based on individual data profiles. This legislative initiative, however, conspicuously avoids the term "digital advertising," a linguistic strategy aimed at circumnavigating potential conflicts with federal law and a likely protracted legal battle, similar to the one Maryland has been embroiled in for years. The move signals a growing trend among states seeking new revenue streams from the rapidly expanding digital economy, but it also highlights the significant legal and constitutional hurdles inherent in taxing online commerce.
The Legislative Proposal: SB 287’s Nuances and Definitional Challenges
Senate Bill 287 defines the taxable activity as "targeted advertising" that involves a bidding mechanism and the use of individualized data profiles to serve advertisements. This definition, while seemingly broad, is meticulously crafted to describe the operational models predominantly used by major digital advertising platforms. Proponents of the bill suggest this specific phrasing is intended to make the tax agnostic to the medium of advertising, thereby theoretically avoiding the "digital" label that has proven problematic elsewhere. However, a closer examination reveals that the practical application of this definition exclusively targets advertising delivered through digital channels, such as social media platforms and search engines.
The bill’s architects appear to be employing a legislative technique sometimes referred to as "bracketed" language. This method involves defining a class of entities or activities with such specific characteristics that, in practice, it applies to only one or a very limited number of subjects, despite not naming them directly. For instance, a hypothetical law might describe "a county with a population between 140,000 and 150,000 as of the 2020 decennial census, designated as at least 40 percent rural, and utilizing a council-manager form of government." If only one county fits this description, courts often scrutinize whether the law’s intent was to circumvent restrictions on special legislation. In the context of SB 287, critics argue that the description of "targeted advertising" involving bidding and individualized data profiles creates a "closed class" that, in essence, exclusively encompasses digital advertising models. Federal courts, which prioritize the substance of a law over its superficial form, would likely analyze SB 287’s impact to determine if it truly taxes a broad range of advertising or if its practical effect is limited solely to digital platforms. If the latter holds true, the judiciary is expected to evaluate the bill as if it were explicitly a tax on digital advertising, regardless of the legislative nomenclature.
The Shadow of Maryland: A Precedent in Progress
Utah’s legislative efforts unfold against the backdrop of Maryland’s ongoing legal saga, which serves as a critical precedent for any state attempting to tax digital advertising. Maryland’s Digital Advertising Tax (DAT), enacted in 2021, was the first of its kind in the United States. It levies a tax on annual gross revenues derived from digital advertising services in the state, with tiered rates based on a company’s global annual gross revenues.
Chronology of Maryland’s Digital Advertising Tax:
- February 2021: Maryland enacts the nation’s first digital advertising tax, overriding a gubernatorial veto. The law applies to companies with global annual gross revenues exceeding $100 million.
- March 2021: Various industry groups, including the U.S. Chamber of Commerce and NetChoice, file lawsuits challenging the tax. They argue it violates the federal Internet Tax Freedom Act (ITFA), the U.S. Constitution’s Commerce Clause, and the First and Fourteenth Amendments.
- October 2021: A Maryland lower court rules the tax unconstitutional, agreeing with the plaintiffs that it violates ITFA and the Commerce Clause. The court issues an injunction preventing the state from enforcing the tax.
- November 2022: The Maryland Supreme Court overturns the lower court’s decision, but on procedural grounds. It rules that the case should have initially been heard in the Maryland Tax Court, not a state circuit court, due to the nature of the tax challenge. The higher court does not rule on the merits of the constitutional arguments.
- 2023-2024: The case is remanded to the Maryland Tax Court, where arguments on the ITFA and Commerce Clause challenges are expected to be heard. The legal battle continues, leaving the long-term viability of Maryland’s tax, and by extension, similar taxes in other states, in considerable doubt.
The Internet Tax Freedom Act (ITFA), originally enacted in 1998 and made permanent in 2016, is a cornerstone of federal policy designed to prevent discriminatory taxes on electronic commerce. It broadly prohibits state and local governments from imposing taxes that specifically target or disproportionately burden internet access or online commercial activities. Most legal observers and tax policy experts believe that digital advertising taxes, such as Maryland’s and Utah’s proposed measure, directly violate ITFA because they single out and discriminate against electronic commerce. The ongoing litigation in Maryland has deterred many other states from following suit, as lawmakers prefer to await a definitive ruling rather than expose their own states to costly and protracted legal battles that they are likely to lose. While proponents of these taxes have advanced creative arguments attempting to distinguish them from the prohibitions of ITFA, the consensus among legal experts remains that the federal law presents a significant impediment to this class of taxes.
Legal Hurdles for Utah: ITFA and Constitutional Challenges
Even with its carefully worded language, Utah’s SB 287 faces substantial legal challenges under ITFA and the U.S. Constitution. As discussed, if a court determines that the "targeted advertising" defined in SB 287 is, in practice, exclusively digital advertising, then ITFA’s prohibition against discriminatory taxes on electronic commerce would apply directly. The argument that the tax is "agnostic" to the medium would likely be dismissed if the substance of the law targets only digital platforms.
Beyond ITFA, the legislation also raises serious questions under the Commerce Clause of the U.S. Constitution. The Commerce Clause grants Congress the power to regulate interstate commerce and implicitly limits states’ abilities to enact laws that unduly burden or discriminate against such commerce. One significant concern with SB 287, similar to Maryland’s tax, is the use of a liability threshold based in part on gross worldwide advertising revenues. This approach effectively employs a factor—revenue generated globally—that is unrelated to Utah’s jurisdiction to determine a company’s taxability within the state. This could be interpreted as an extraterritorial application of state law, where Utah’s tax reach extends beyond its borders, influencing business activities that occur entirely in other jurisdictions. Such "tax exportation" or the creation of a risk of "double taxation" is generally disfavored under Commerce Clause jurisprudence.
Furthermore, these taxes could potentially face First Amendment challenges, particularly regarding freedom of speech. Advertising is often considered a form of commercial speech, which receives some constitutional protection. Taxes that disproportionately burden certain types of speech, even commercial speech, could be challenged as infringing on these rights, especially if they are seen as targeting specific content or platforms. While the original article did not delve deeply into this, it is a common argument raised against digital advertising taxes by industry groups.
Economic Impact and Policy Implications for Utah
Beyond the complex legal landscape, SB 287 carries significant economic and policy implications for Utah. While the tax would be collected and remitted by large digital platforms, the economic burden is ultimately expected to fall on the businesses that purchase advertising in Utah—many of which are small and medium-sized local businesses. This dynamic is similar to how a sales tax is collected by retailers but ultimately paid by consumers. Utah businesses, from local restaurants to car dealerships, rely heavily on targeted digital advertising to reach their in-state customer base efficiently and cost-effectively. An advertising tax would increase their operational costs, potentially leading to higher prices for consumers, reduced marketing budgets, or slower business growth.
According to data from the Small Business Administration, small businesses account for over 99% of all businesses in Utah, employing a substantial portion of the state’s workforce. Many of these businesses have embraced digital advertising as a crucial tool for survival and growth in an increasingly competitive market, especially in the post-pandemic era. Taxing this essential business expense could disproportionately impact their ability to compete and reach customers.
Moreover, such taxes have the potential to disrupt the broader digital economy. Many online services and platforms are currently offered for free, supported by advertising revenue. By making ad-supported models less profitable, these taxes could incentivize platforms to shift towards paid subscription services, potentially limiting access to information and services for users unwilling or unable to pay. This could create a digital divide and alter the fundamental economic model of the internet.
Finally, the state of Utah must consider the financial and administrative costs associated with implementing and defending such a tax. Maryland’s experience demonstrates that these taxes invite protracted and expensive litigation. Diverting state resources to a legal battle that most experts believe will ultimately fail to withstand federal scrutiny represents a significant opportunity cost, potentially detracting from other pressing state priorities.
Expert Analysis and Stakeholder Reactions
Tax policy experts, including those at the Tax Foundation (the original source of this analysis), consistently highlight the legal vulnerabilities and economic inefficiencies of digital advertising taxes. They argue that these taxes represent a piecemeal and discriminatory approach to revenue generation that distorts markets and burdens local businesses. From their perspective, the attempt to skirt federal law through definitional gymnastics is unlikely to succeed in court.
Industry groups representing technology companies and advertisers, such as NetChoice and the Interactive Advertising Bureau (IAB), have been vocal in their opposition to such taxes, viewing them as discriminatory, anti-competitive, and ultimately harmful to small businesses. They often emphasize the vital role digital advertising plays in supporting local economies and providing free or low-cost online services.
Lawmakers proposing these taxes often articulate multiple motivations. Primary among them is the desire to generate new revenue for state coffers, especially as traditional tax bases may face pressure from evolving economic landscapes. There’s also a clear underlying sentiment among some legislators that large technology companies, often perceived as highly profitable and paying insufficient taxes, should contribute more to state revenues. Furthermore, some proponents may see these taxes as a way to address broader societal concerns related to social media’s impact or data privacy, although critics argue that a tax on advertising is an ineffective and indirect tool for achieving those goals.
Broader National Context and Future Outlook
The debate surrounding digital advertising taxes in Utah and Maryland is part of a larger, evolving national and international conversation about how to tax the digital economy. As digital services and e-commerce continue to grow, traditional tax structures designed for physical goods and services are struggling to keep pace. Many states are exploring new ways to capture revenue from this sector, ranging from sales taxes on digital goods and services to various forms of "digital services taxes" (DSTs) that have gained traction in European countries.
However, the U.S. approach to DSTs has been complicated by the federal Internet Tax Freedom Act, which creates a unique legal landscape compared to other nations. While the European Union and individual European nations have moved forward with their own DSTs, often targeting large tech companies, these efforts have frequently drawn criticism from the U.S. government, which views them as discriminatory against American firms. The ongoing international negotiations under the OECD’s Pillar One and Pillar Two initiatives aim to establish a global framework for taxing multinational corporations, including digital giants, which could eventually influence domestic state-level approaches.
For Utah, the immediate future of SB 287 hinges on its legislative journey and, if enacted, its eventual confrontation with the courts. Given the legal precedent set by Maryland’s experience and the strong federal protections under ITFA and the Commerce Clause, the path for Utah’s "targeted advertising" tax appears fraught with legal peril. Rather than solving revenue challenges or addressing social media concerns, this legislation is more likely to usher in years of expensive litigation, placing a burden on Utah businesses and the state’s taxpayers, without a clear prospect of a stable new revenue stream. The outcome in Utah will undoubtedly be closely watched by other states grappling with similar fiscal pressures and seeking to adapt their tax codes to the realities of the 21st-century digital economy.
