Utah Porn and Ad Taxes Would Boost Litigation More Than Revenue

State tax lawyers are like radiologists—they live in a world of shadows and grays. Give us a poorly drafted statute, and our hearts flutter, no matter how sincere the drafters’ motives. Two recent bills in Utah illustrate this phenomenon.

The first is Utah’s proposed new tax contained in Senate Bill 287, which creates a new Chapter 35 titled “Targeted Advertising Tax.” The tax would be imposed on advertising that meets the following conditions:

• A business entity sells advertising through a “bidding process”
• The business entity obtains or develops individualized data profiles to deliver the advertising
• The recipient of the advertising can “interface with the advertisement to access information or make a purchase, including through a link or quick response (QR) code.”

These conditions limit the tax’s imposition to advertising that is bought, delivered, accessed, or interacted with using the internet. So the tax raises the specter of violating the Internet Tax Freedom Act and face a certain and immediate challenge. The ITFA, a federal statute that limits state taxation of electronic commerce, serves to protect electronic commerce from taxes.

The Utah tax targets advertising that falls within the ITFA definition of “electronic commerce”—any transaction conducted, offered, or delivered over the internet. The tax’s requirement that it is imposed on a business entity’s advertisements that “interface” with its audience makes it all but certain that the tax is designed to fall heavily, if not exclusively, on electronic commerce.

The tax also contains thresholds to protect smaller, and presumably in-state, advertisers. Those with less than $1 million of Utah advertising or less than $100 million of targeted gross receipts are exempt from the tax. And the bill exempts entities with less than 50% of receipts from targeted advertising.

This familiar playbook of creating facially neutral criteria to protect in-state advertisers isn’t new, but it is certainly suspect (or sus, as our kids say). Taxing large, out-of-state advertisers while disproportionately protecting in-state advertisers may violate the dormant Commerce Clause.

Another key feature of this tax is that it is apportioned based on a percentage of an advertiser’s Utah audience. How does one know whether someone is viewing a given advertisement in Utah—or anywhere else? The bill doesn’t help answer this question, as it doesn’t provide any rule or method for situsing an advertisement.

Although IP addresses provide a method to estimate audience location, the use of virtual private networks can distort that location. And because advertisers often don’t know the location of their audience, there is a temptation to use proxies to estimate an audience. However, using pro-rata estimates based on population, gross domestic product, or some other arbitrary metric leads to a capricious tax that isn’t dependent on any taxpayer’s actual activity or business.

The tax may also run afoul of the ITFA’s ban on discriminatory taxes. The ITFA defines “discriminatory tax” inter alia as “(A) any tax imposed by a State or political subdivision thereof on electronic commerce that (i) is not generally imposed and legally collectible by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means.” Because the proposed tax applies to little or no offline similar transactions, it is vulnerable to an ITFA challenge.

A very similar issue was presented to the Maryland Tax Court. That opinion is expected soon. Utah should wait for that decision before implementing its legally suspect tax.

The second Utah tax proposal, Senate Bill 73, would tax online providers of material that is “harmful to minors.” It seeks to impose a 2% tax on the sales price of statutorily defined “covered transactions.” The bill’s definition of material harmful to minors includes, in part:

• “any material that the average person, applying contemporary community standards, would find, taking the material as a whole and with respect to minors, is designed to appeal to, or is designed to pander to, the prurient interest”
• material that exploits or principally consists of descriptions or displays that are “patently offensive”
• material, taken as a whole, lacks serious literary, artistic, political, or scientific value for minors.

The bill elaborates with some detail on human body parts and sexual acts that are “patently offensive.” Ironically, the terms used are too graphic to be repeated here.

One doesn’t need to be a First Amendment scholar to realize that these parts of the statute will be litigated for years.

We doubt this type of tax experiment will efficiently raise revenue. These tax proposals will instead lead to invitations to litigate rather than serious efforts to support government services. Alas, the road to litigation is paved with misbegotten intentions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Richard D. Pomp is a professor at University of Connecticut Law School and member of the American College of Tax Counsel.

Jeffrey A. Friedman is a partner at Eversheds Sutherland whose practice includes state and local tax planning, compliance, legislation and policy, and litigation and controversy matters involving income, franchise, sales and use, and property taxes.

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