On July 28, 2026, McDermott Will & Schulte, together with Holland & Hart, filed a verified complaint on behalf of the Utah Taxpayers Association challenging Utah’s new targeted advertising tax. The lawsuit asks the Third Judicial District Court in Salt Lake County to declare the tax unlawful and unconstitutional and permanently enjoin the Utah State Tax Commission from enforcing it. Because the action challenges the constitutionality of a Utah statute, state law requires the case to be heard by a three-judge district court panel.
Enacted earlier this year as Senate Bill 287 and codified at Utah Code Ann. § 59-35-201, Utah’s tax borrows from Maryland’s digital advertising gross receipts tax but applies specifically to receipts from “targeted advertising.” The law imposes a 4.7% tax on Utah gross receipts from targeted advertising earned by an entity that derives at least:
- $1 million in annual gross receipts from targeted advertising in Utah
- $100 million in annual gross receipts from targeted advertising worldwide
- 50% of its total worldwide gross receipts from targeted advertising.
The tax applies to taxable periods beginning on or after January 1, 2027.
Although the statute describes targeted advertising as the delivery of an advertisement “by any means,” the law’s cumulative definitions limit the tax to advertising delivered over the internet. Similar advertising delivered through newspapers, radio, television, billboards, and other non-internet channels is not subject to the tax.
The complaint asserts four claims:
- The tax is preempted by the federal Internet Tax Freedom Act (ITFA), which prohibits states from imposing discriminatory taxes on e-commerce. Utah’s tax violates ITFA because it applies to advertising delivered over the internet while leaving comparable advertising delivered through other channels untaxed.
- The tax is independently barred by ITFA’s prohibition against taxes on “Internet access.” ITFA’s definition of internet access includes certain independently provided content, such as “video clips.” Because Utah’s definition of an advertisement reaches video advertisements delivered over the internet, the tax reaches receipts from internet access itself.
- The tax discriminates against interstate commerce in violation of the Commerce Clause of the US Constitution. No Utah-domiciled business satisfies the law’s worldwide gross-receipts thresholds. Utah businesses earning targeted advertising receipts below those thresholds therefore remain untaxed while larger out-of-state businesses engaging in the same activity are subject to the tax.
- The worldwide gross-receipts thresholds violate due process. Whether an entity owes the Utah tax may depend on receipts and business activities occurring entirely outside Utah, even when those activities have no connection to the state. Utah may not use those extraterritorial activities to determine whether an entity’s Utah receipts are taxable.
Utah is part of a broader pattern. Maryland’s digital advertising gross receipts tax prompted immediate litigation, and Washington’s expansion of its sales tax to advertising services has already been challenged under ITFA. Illinois recently enacted its own targeted advertising tax and should expect to face a similar challenge.
Any state that follows Maryland’s lead by taxing internet advertising while excluding comparable advertising delivered through other channels should assume that it is also choosing litigation – and should be prepared to defend that choice in court.
