internet access Archives

Utah’s targeted advertising tax heads to court

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 [...]

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ITFA Is Alive and Well: New York Advisory Opinion Reaffirms Sales Tax Exemption for Internet Access Services

In its latest Advisory Opinion, TSB-A-24(4)S (June 26, 2024), the New York State Department of Taxation and Finance (the Department) reaffirmed the broad protections offered by the Internet Tax Freedom Act (ITFA) against state and local taxation of internet access. The Petitioner, a New York-based business, sought clarity on whether its subscription to a secure hosted exchange service, which facilitates critical email functions without requiring internal IT infrastructure, would be subject to New York State sales tax.

KEY FACTS AND BACKGROUND

The Petitioner subscribes to a secure hosted exchange service from a provider located in Florida. This service offers comprehensive email management, including mobile device synchronization and Microsoft Exchange functionalities. The service includes (1) unlimited mailbox storage, (2) premium email security protection, (3) anti-virus protection, and (4) live phone support. The service relies on the Petitioner maintaining its own internet connection, with software licensing obligations dictated by agreements with third-party vendors.

THE DEPARTMENT’S RULING

After acknowledging that email service qualifies as taxable telephony or telegraphy service under New York Tax Law § 1105(b)(1), the Department concluded unequivocally that “[e]lectronic mail services are included in the ITFA definition of Internet access, regardless of whether such services are provided independently or packaged with Internet access” and are, therefore, not subject to New York State sales tax. This decision hinges on the protections established by ITFA, which precludes state and local governments from imposing taxes on Internet Access.

ITFA: A CRITICAL SAFEGUARD AGAINST STATE TAXATION

ITFA, enacted in 1998 and made permanent in 2016, has consistently served as a bulwark against state efforts to impose tax on Internet Access and multiple or discriminatory taxes on electronic commerce. See ITFA § 1101(a). Under ITFA’s Internet Access prong, services that enable users to access content, information, email, or other services offered over the internet are shielded from state and local sales taxes.[1] The Advisory Opinion underscores this federal protection, categorizing the Petitioner’s email services as an Internet access service, which is exempt from New York State sales tax under ITFA.

REINFORCING ITFA’S PREEMPTIVE POWER: RECENT CASES

This is not an isolated application of ITFA. ITFA has recently been at the center of significant legal challenges, reinforcing its importance in protecting digital services from state taxation. For example, in Petition of Verizon New York Inc., DTA No. 829240 (N.Y. Div. Tax App. May 4, 2023), an administrative law judge (ALJ) ruled that the gross receipts tax on transportation and transmission corporations could not be applied to revenues from asymmetric digital subscriber line and fiber broadband services because these services are federally preempted under ITFA as Internet Access. In rejecting the Department’s narrow interpretation of internet access services, which only included services provided to end-user consumers, the ALJ emphasized that US Congress intended ITFA’s prohibition on taxing Internet Access to be broad, using the definition from ITFA rather than state tax law.

ITFA’S ONGOING RELEVANCE

New York’s Advisory Opinion highlights the continued importance of ITFA in today’s digital economy. As businesses increasingly [...]

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