A lawsuit has been filed against Utah's new targeted advertising tax, alleging the law is unconstitutional and violates federal law. The legal challenge, filed July 28, 2026, seeks to block the tax that was enacted by the legislature earlier this year and is scheduled to take effect for tax years beginning January 1, 2027.
Legal Challenge Filed
McDermott Will & Schulte and Holland & Hart filed a verified complaint on July 28, 2026, on behalf of the Utah Taxpayers Association. The lawsuit asks the Third Judicial District Court in Salt Lake County to declare the tax unlawful and unconstitutional and to permanently enjoin the Utah State Tax Commission from enforcing it. Because the litigation challenges the constitutionality of a state statute, the case must be heard by a three-judge district court panel.
Terms of the Tax
The lawsuit targets Senate Bill 287, which was signed into law by Governor Spencer Cox on March 25, 2026. The law, codified at Utah Code Ann. § 59-35-201, imposes a 4.7% tax on gross receipts from targeted advertising for specific large entities. Under the statute, an entity is subject to the tax if it earns at least $1 million in annual gross receipts from targeted advertising in Utah, has at least $100 million in total worldwide gross receipts from targeted advertising, and derives at least 50% of its total worldwide gross receipts from targeted advertising.
Constitutional Arguments
The legal complaint asserts four primary claims against the tax. First, it alleges the tax is preempted by the federal Internet Tax Freedom Act (ITFA), which prohibits states from imposing discriminatory taxes on e-commerce. The complaint argues the tax violates the ITFA by applying to advertising delivered over the internet while leaving comparable advertising delivered through other channels, such as newspapers, radio, or television, untaxed.
Second, the lawsuit claims the tax is barred by the ITFA's prohibition against taxes on internet access, arguing that because the tax reaches video advertisements, it effectively reaches receipts from internet access itself. Third, the complaint alleges the tax discriminates against interstate commerce in violation of the Commerce Clause of the U.S. Constitution. The filing notes that no Utah-domiciled business meets the worldwide gross-receipts thresholds, meaning local businesses remain untaxed while larger out-of-state competitors are subject to the levy. Finally, the lawsuit argues the worldwide gross-receipts thresholds violate due process by allowing the state to use extraterritorial business activities to determine tax liability.
Economic Concerns
The National Taxpayers Union (NTU) had previously urged Governor Cox to veto the bill in a request dated March 11, 2026. In that request, NTU Director of State External Affairs Mattias Gugel argued that while the bill seeks to fund initiatives like child literacy and mental health services, the tax is economically unsound.
According to the NTU, the tax is based on gross receipts rather than net income, meaning it does not account for profitability or economic cycles. The organization warned that such taxes rarely remain limited to their intended targets; instead, the economic burden is often passed to consumers and small businesses through higher advertising costs. The NTU cited a Deloitte assessment of a similar tax in France, which found the burden fell on consumers (55%) and business users (40%), while only 5% was borne by the large internet companies targeted.
Implementation and Impact
The tax, established by Senate Bill 287, is designed to target businesses that use data-driven targeting methods to deliver advertisements. This includes entities that sell advertising space through a bidding process, obtain or develop individualized data profiles, and deliver advertisements that allow for user interaction via links or QR codes.
While the law's cumulative definitions limit the tax to internet-based advertising, the tax is scheduled to apply to tax periods beginning on or after January 1, 2027. A fiscal note from February 17, 2026, estimated that the tax could increase tax liability for certain entities by $15.2 million in FY 2028 and $21.3 million in FY 2029.
National Context
The litigation in Utah follows a broader national trend of legal challenges to digital advertising taxes. Similar litigation occurred in Maryland, where the U.S. Court of Appeals for the Fourth Circuit found part of the state's digital advertising tax law unconstitutional in August 2025 for violating the First Amendment. Other states, including Washington and Illinois, have also faced or implemented similar measures that have drawn scrutiny under federal law.
