Utah lawmakers look poised to pass a new tax intended to punish big social-media companies. The law won’t achieve its stated goal of protecting kids from data mining, but it will do plenty of damage to small businesses in the state.
The new law effectively targets tech giants like Meta and Alphabet by imposing a 4.7 percent tax on high-revenue companies that generate most of their income from targeted advertising. They also have to bring in at least $1 million from ads in Utah.
State Sen. Michael McKell (R) says his idea, which has passed the state Senate and is now being considered in the lower chamber, will punish practices that treat the attention of kids “like an asset to be extracted, optimized and sold.” Money raised by the tax would fund child literacy programs.
Taxing an entire online business model isn’t going to solve its worst side effects, and highly profitable social-media companies will simply pass the cost of the tax down to smaller businesses that rely on social media to reach their customers.
Social media and online platforms are huge sources of innovation, education and human connection. They’re among the best ways for a mom-and-pop startup to get the word out about its new products. A bill as blunt as Utah’s fails to differentiate between the good and the bad, and it “taxes just about anything received on the free internet,” according to the Tax Foundation’s Jared Walczak.
Maryland has already imposed a similar law, and Utah would be the second state to do so. If others follow, free online platforms would feel pressure to rely less on ad revenue and move toward subscription-based models. This would fragment social media further and might elevate less responsible platforms that don’t have the scale or scrutiny afforded by bigger companies.
Yet federal law is the main reason Maryland is the only other state that has tried to tax digital advertising. It is probably unconstitutional under the Commerce Clause because it’s indexed to out-of-state earnings. It also runs afoul of the Permanent Internet Tax Freedom Act, a federal law that bans state and local governments from levying discriminatory taxes on ecommerce. A lower court in Maryland ruled in October that the state’s 2021 tax violates both that federal law and the Constitution. The Maryland Tax Court will hear an appeal this year.
The Utah bill tries to avoid violating the federal law by saying the tax applies to “targeted advertising” instead of “digital advertising,” but courts are likely to see through that sleight of hand. If Utah enacts the tax, a judge could eventually order the refunding of any money collected — while still leaving the Beehive State on the hook for legal and administrative costs. That’s not a risk worth taking.
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