Utah’s New Tax Will Likely be ‘Targeted’ by Legal Challenges

In the early 1990s, the automotive industry hit upon a novel idea: replacing the phrase “used cars” with “pre-owned” vehicles and, even better, “certified pre-owned cars.” The rationale, to eliminate the “lemon” stigma many consumers associated with used-car lots, was straightforward and effective. By adding “certified” to “pre-owned” (along with offering more robust warranties), dealers discovered they could charge more for used cars, which now generate higher profit margins than new cars in most cases.

The Utah legislature recently employed a similar approach by attempting to rebrand a new digital advertising tax as a “targeted” advertising tax. While it remains to be seen as whether this gambit will succeed, the new law will likely face legal challenges based on the Internet Tax Freedom Act (ITFA) and the Commerce Clause of the U.S. Constitution, among other legal and possibly technical digital taxation concerns, etc.

Starting in 2027, Utah’s SB 287 (Targeted Advertising Tax) imposes an annual tax of 4.7% on “targeted advertising entities,” which are defined as business entities that deliver ads through a bidding process using individualized data profiles, where recipients can interact with the ad (usually via a link or QR code). The tax applies to entities generating $1 million or more in Utah-targeted advertising gross receipts, $100 million or more in global advertising gross receipts, and for which targeted advertising constitutes 50% or more of total gross receipts. The tax, which tracks Utah's general sales tax rate (4.7%), is scheduled to take effect on Jan. 1, 2027. As Bloomberg Tax pointed out in April, the Big Tech fight is looming…

The primary legal argument against Utah’s targeted advertising tax concerns the ITFA, which prohibits states from imposing discriminatory taxes on electronic commerce. While Utah’s legislature tried to circumvent this restriction by avoiding the phrase “digital advertising,” this semantic maneuvering seems unlikely to withstand judicial scrutiny.

Another issue involves the Commerce Clause, which restricts states from imposing tax burdens that discriminate against or unduly burden interstate commerce. As a recent analysis by the Tax Foundation points out, SB 287’s liability threshold, which links to gross worldwide advertising revenues as a condition for taxability, means that advertising platforms’ “taxability in Utah would be influenced by ads run in other jurisdictions.” This type of extraterritorial reach could be challenged as exceeding the state's constitutional taxing authority.

In addition to keeping tabs on the litigation ahead, indirect tax leaders should treat Utah’s new law as a leading indicator of evolving digital taxation strategies. Most states are closely watching and learning from lawsuits tied to digital tax legislation, with the goal of drafting constitutionally defensible rules that can withstand legal challenges and ultimately create a more profitable fiscal outcome.

While Utah is now the second state, following Maryland, to implement a digital advertising tax on gross receipts, Utah estimates that it would generate $15.2 million in fiscal year 2028 and $21.3 million in fiscal year 2029. If the law withstands the expected legal challenges from Big Tech, the legislature will later determine how to allocate the funds. However, recently, Pennsylvania legislators announced that they, too, are reviewing House Bill 1678, a proposed law that will extend the state's 5% gross receipts tax to cover digital advertising. The bill's goal is to boost revenue by taxing major digital advertising platforms. Given current conditions and forecasted baseline budget deficits in most U.S. states, state and local governments are likely to pursue additional tax revenue to balance their budgets and fund public services, possibly helping address the state affordability crunch.