Utah lawmakers passed a new tax law this year meant to rein in large tech companies that they argue profit from business models that exploit children. But a collection of small-business owners, anti-tax advocates and groups that defend digital advertising pushed back.

Now, as many predicted, the fight is in court.

The Utah Taxpayers Association filed a lawsuit against the Utah State Tax Commission, asking a panel of 3rd District Court judges late last month to declare SB287 (the “Targeted Advertising Tax” bill) unlawful under the U.S. Constitution and federal Internet Tax Freedom Act. The act bars states from enacting “discriminatory taxes on electronic commerce.”

Utah’s law specifically takes aim at targeted online advertising, which is pushed onto users based on data that companies collect about an individual’s online interests and habits. It levies a 4.7% tax — the standard retail sales tax rate — on gross receipts from such ads.

The tax applies only to large companies that derive at least half of their total revenue from targeted advertising. These companies must also generate at least $100 million from targeted advertising annually, including at least $1 million in Utah.

That would preclude most Utah small businesses, bill sponsor Sen. Mike McKell, R-Spanish Fork, said at the time. But he conceded those businesses may also feel some squeeze if larger companies impose higher prices on ads to make up for the tax.

“It could be passed on,” he said. “There’s no question.”

He argued that price is worth it to protect children. Targeted advertising, he said, is “intentionally designed to addict our minors.”

“We need to change behavior,” McKell continued, “and we need to get these companies to rethink their business model.”

Revenue collected through the tax is supposed to fund programs on child literacy, sports, mental health and more, he said.

Utah joined a growing list of states that now tax advertising sales, including Maryland and more recently Illinois. Maryland’s law, enacted in 2021, has been tied up in litigation over its constitutionality for years; the state has collected more than $400 million so far, according to the Institute on Taxation and Economic Policy.

A spokesperson for the Utah State Tax Commission declined to comment on the pending litigation. He noted the Utah attorney general’s office is preparing a response to the lawsuit.

The law took effect May 6, but the tax begins Jan. 1, 2027.

Impacts on small businesses

One fan of the tax strategy: The Institute on Taxation and Economic Policy, a progressive tax-policy think tank.

They said in a June blog post that such taxes are a way states access revenue they are otherwise losing, money that could “be funding schools, healthcare, and other public services.”

Instead, that money is going “into the pockets of Alphabet, Meta, Amazon, and other very large companies,” according to a report the institute released in May.

Billy Hesterman, with the Utah Taxpayers Association, sat before Utah lawmakers March 3 and said his group opposed the tax because, they believe, fundamentally, that any tax on a business is a “myth” and a “way to hide a government cost.” His group ultimately filed the legal challenge.

When businesses are taxed, he told the House Economic Development and Workforce Services Committee, they have three options: They can either eat the tax in lost revenue, pay employees less or charge more for their goods or services — and Hesterman said they never choose the first option.

Hesterman clarified that he supports increasing mental health resources and protecting children.

“We welcome that,” he said. “We just think that that can be funded through the general fund and through the money that we already have, versus doing it through a tax that’s going to hit our Utah small businesses.”

‘REPUBLICANS DON’T RAISE TAXES’

In addition to feedback from tax-watchdogs and small businesses, legislators were also bombarded by constituents who had apparently received ads against the bill — “with very devious-looking faces that are A.I.-generated,” McKell said.

McKell said he’d heard from opponents that his proposed law was “clearly unconstitutional” and would “never withstand scrutiny.”

He entered into the record a black flyer that featured an image of himself with the message: “REPUBLICANS DON’T RAISE TAXES.”

“Well, it feels like they’re pretty worried about it,” he quipped.

When Hesterman began his testimony, he made a clarification, distancing himself from any A.I.-generated campaigns.

“First and foremost, I’ll note that I — me or my organization — did not send any texts or A.I.-generated whatevers to anyone on the committee or in the House or Senate. I’ve only had one-on-one conversations with each of you about our concerns with this legislation.”

The opposition may have had the opposite intended effect on some lawmakers.

Rep. Colin W. Jack, a member of the committee, said that ahead of that day’s meeting, he “started getting a flood of hate emails and texts and phone messages accusing me of being a dirty tax raiser — even though, as far as I know, I’ve always voted to lower taxes.”

Jack, R-St. George, said he learned at the hearing that the campaign was likely funded by “large social media companies” who had targeted registered voters.

“I wanted to put on the record that they did switch my vote,” he said. “I was against this tax increase, but now I’m all for it.”