Utah has officially joined the digital advertising tax movement, following Maryland and (most recently) Washington State. As Bloomberg Law notes, “Big Tech” is sure to challenge the Utah tax. Although all three states are targeting the same general activity and the same general class of taxpayers, and use a gross receipts approach, each state’s statutes differ in meaningful ways, as discussed below.

The Utah legislature attempted to avoid at least some of the more blatant infirmities embodied in the Maryland approach, although the Utah statute is still susceptible to challenge. Most importantly, Utah avoids drawing a “digital” distinction in the plain language of the statute and instead use the term “targeted advertising,” which some Utah legislators believe will insulate the tax from Internet Tax Freedom Act (ITFA) challenges. The statute, however, may implicitly draw a digital distinction by using “impressions” as a requirement for the tax imposition. It is fairly obvious that almost all traditional advertising will fall outside the tax requirements, while almost all digital advertising will fall within its scope. But there are conceivable examples of traditional advertising that seemingly would (likely inadvertently) be subject to tax, such as direct mailings that contain a hyperlink or QR code printed on the material. How that impacts the ITFA analysis remains to be seen.

The Utah tax uses the number of “impressions” for its apportionment formula, which seems potentially more accurate (but more more administratively burdensome) than Maryland’s “device” apportionment approach. Utah has also skipped Maryland’s “pass-through prohibition” that the 4th Circuit held to violate the First Amendment.

Also of note, the Utah tax applies only to “business entities” that derive at least 50% of their gross revenues from “targeted advertising.” This requirement actually remedies a substantial shortcoming in the Maryland approach, where large multinational companies may be subject to the digital advertising tax because of their non-advertising gross revenues even though they engage in (comparatively) nominal advertising activities. But it also seemingly pulls many large tech companies out of the tax imposition. Many of the largest tech companies derive the majority of their gross revenues from cloud computing or device sales, for example, even if they also have billions of digital advertising gross revenues (like Maryland, Utah fails to adopt a “combined” or “consolidated” return approach, which complicates this analysis and may result in lower tax rates even if a subsidiary is ultimately subject to the tax). Whether this result was intentional or not also remains to be seen.

Additional Commentary:

• More States Proposing Social Media Taxes and Digital Ad Taxes
• Andrew Appleby (Tennessee), Subnational Digital Services Taxation, 81 Md. L. Rev. 1 (2021)
• Young Ran (Christine) Kim (Cardozo) & Darien Shanske (UC-Davis), State Digital Services Taxes: A Good and Permissible Idea (Despite What You Might Have Heard), 98 Notre Dame L. Rev. 741 (2022)
• Walter Hellerstein (Georgia) & Andrew D. Appleby, The Internet Tax Freedom Act at 25, 107 Tax Notes State 7 (2023)