Illinois' doomed plan to tax social media

Illinois can tax income. It can tax profits. It can tax businesses. It can even impose generally applicable taxes that happen to reach content mediums like cable or newspapers.

But the First Amendment strictly prohibits taxes that single out content the state doesn’t like. Unfortunately, that’s exactly what Illinois’ new state spending plan does, and it’s poised to soon be signed by Governor Pritzker.

Buried in the 1600-page budget, the relevant provision would charge the secretary of state with collecting a “social media platform fee.” Platforms covered by the proposal pay the fee monthly, with the size of the bill set by “the number of Illinois users from whom the social media platform collects data within a month.”

Pinpointing where exactly the problems that doom this proposal begin is a tall order.

Doomed in the courts

The proposal’s biggest hurdle is the decades of case law that have squarely labeled this kind of tax as exactly what it is: a regulation of speech.

And social media sites are very much speech. As the Supreme Court stated in the recent landmark case Moody v. NetChoice, “To the extent that social-media platforms create expressive products, they receive the First Amendment’s protection.” That means the government can’t restrict or single out their content for regulation, and that includes singling them out for taxation.

That principle did not begin with social media, or even modern First Amendment law. In fact, it dates all the way back to England in the early 18th century, and in the American colonies with the resistance to the 1765 Stamp Act. That Act, which required publications such as pamphlets and newspapers to pay a tax and carry a special government stamp, sparked the first unified protests against British rule that eventually led to the Revolution.

In Grosjean v. American Press Co., the Supreme Court explained that English taxes on newspapers and advertisements like those introduced in the Stamp Act were not simply revenue measures. They were understood as efforts to suppress criticism of the government by making publication and circulation more difficult. These “taxes on knowledge” helped animate the First Amendment’s strong protections, and they influenced the outcome in cases like Grosjean.

In that 1936 case, the Court weighed a Louisiana tax on newspapers passed by allies of Louisiana Senator Huey Long. The plaintiffs argued that Louisiana’s 2% tax on newspapers with weekly circulations above 20,000 copies targeted the papers most critical of Long.

That connection between the financial burden of the tax and the potential circulation of the newspaper is exactly why the Court said such taxes “operate as a restraint” on speech. “First, [the tax’s] effect is to curtail the amount of revenue realized from advertising” and “second, its direct tendency is to restrict circulation.”

The connection the Court draws in Grosjean between the financial burden and the circulation of speech is relevant to the Illinois bill in more ways than one. On top of the platform fee described above, the Illinois budget proposal also imposes a 10% digital targeted-advertising tax on receipts from targeted ads provided in the state, a tax which expressly includes “advertising on social media.” Following the logic of the Grosjean Court, it’s another way the Illinois proposal discourages the speech it disfavors.

The holding that taxes on speech are speech regulation doesn’t end with Grosjean.

In 1983’s Minneapolis Star v. Minnesota Commissioner of Revenue, Minnesota imposed a special use tax on paper and ink used by publications, with an exemption that meant only a handful of publishers paid significant amounts. Unlike in Grosjean, there was “no indication . . . of any impermissible or censorial motive” behind Minnesota’s tax. But that did not save it.

That’s because the First Amendment problem was structural: Minnesota had “singled out the press for special treatment.” In burdening a specific group of speakers, the Court held the law was presumptively unconstitutional. The Court made clear that “illicit legislative intent” is not necessary for there to be a First Amendment violation.

While the Illinois proposal similarly singles out a group of speakers — social media platforms — it also categorizes them based on their content: the burden applies only to platforms where users “create, share, and view user-generated content.” Arkansas Writers’ Project, Inc. v. Ragland is instructive. There, the Court struck down an Arkansas sales-tax scheme that exempted newspapers and “religious, professional, trade and sports journals and/or publications printed and published within this State,” but not general-interest magazines. The Court characterized that content-based burden as “even more disturbing” than the speaker-based burden in Minneapolis Star. Again, it was presumptively unconstitutional.

This line of cases was further backed up for the internet age by the federal Internet Tax Freedom Act, which prohibits discriminatory taxes on electronic commerce. By “targeting large online platforms without a comparable tax on offline media or communication services,” the Illinois Policy Institute concludes the social media tax proposal could be doomed by federal law before even getting around to the First Amendment arguments, not to mention its other problems.

Doomed in the details

The proposal’s constitutional problems are reason enough to reject it. But even setting those aside, its details are riddled with flaws that doom the implementation of the proposal to a mess of confusion and unnecessary burdens.

First, its sloppy definition of which platforms are covered by the proposal would leave a plethora of websites outside the social media umbrella as collateral damage.

Per the bill’s language, “[c]overed platforms” are platforms where users “create, share, and view user-generated content” that “can be viewed by other users of the medium” and “primarily serves as a medium for users to interact with content generated by other users of the medium.”

That casts a wide net.

While the definition would surely include X and Facebook, the list of sites on which users interact with other users’ content is long. That could include publishing sites from Substack to FanFiction.Net, messaging services, review sites, and even crowdsourced fan wikis.

Often, statutory definitions like this include a range of carve-outs to help guide our understanding of their language. Instead, Illinois leaves us with a single explicit exemption: “‘Social media platform’ does not include a not-for-profit organization.”

The proposal’s vague guidance could have straightforward consequences. Content-sharing sites with large audiences but limited revenue streams often run on lean budgets, unlike the sprawling social media giants this bill seems designed to target. Imgur, for example, had at one point 30 million monthly users but two employees.

The lack of clarity around whether a small team like that is responsible for a large monthly fee could be an existential question. This could chill the inclusion of collaborative features that platforms might fear will land them a visit from the tax collector — sorry, the secretary of state.

Platforms are also left to their imagination to discern what exactly counts as a “user” for purposes of calculating the tax. Is a user an account? A unique individual who might have multiple accounts? What about simple lurkers of the site with no account? The ultimate answer could make a big difference in the monthly fee platforms will plan to face.

We’re not surprised to see a proposal like this filled with ambiguities and holes. As states have attempted to turn around the losing streak social media regulation has faced in court, we’ve seen a number of half-baked schemes to find some kind of creative workaround. States have tried to avoid scrutiny by casting their speech restriction as regulating “design choices,” by targeting platforms through the app store, and by labeling their target “conduct” rather than “speech.”

Fortunately for free speech, the courts aren’t impressed. An attempt to punish speech is an attempt to punish speech, any way it’s structured.