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Administration proposes sales tax on electronically delivered prewritten software, sparking business opposition
Summary
The May Revision would extend California sales tax to electronically delivered prewritten software, including many SaaS products, estimated to raise $450M in 2026–27 and $900M thereafter; business groups and tech trade associations urged rejection, citing cost and competitiveness concerns.
The Department of Finance proposed extending California sales and use tax to electronically delivered prewritten software, including many software-as-a-service products, beginning Jan. 1, 2027, an administration official told the Assembly Budget Subcommittee No. 5.
Colby White of the Department of Finance said the measure is intended to modernize the tax base and bring California in line with other states. "This proposal will simply extend equitable sales [tax] to prewritten software regardless of how it is delivered, consistent with what is occurring in the majority of other states," White said.
The department estimated the change would boost general fund revenues by about $450 million in 2026–27 and $900 million annually thereafter, and increase local revenues by roughly $560 million in 2026–27 and $1.1 billion subsequently. Officials said they used New York taxable-sales data adjusted for California's consumption patterns to produce the estimate.
The Legislative Analyst's Office (LAO) welcomed the goal of modernizing the sales-tax base but urged modifications, including considering broader digital products and a business-to-business exemption to avoid imposing cascading costs, the LAO analyst said.
"If the legislature wants to address these issues, we recommend that you consider a modified version of the governor's proposal that lines up more closely with those overarching policy goals," the LAO said.
Industry groups strongly opposed the change at the hearing. JC Lee of the California Taxpayers Association said the expansion "sets a dangerous precedent for taxing services" and would raise prices at a time of affordability strain. Jose Torres of TechNet warned it would raise costs for digital tools that small businesses rely on, including cybersecurity, payroll and AI tools.
CDTFA staff said trailer-bill language would be posted imminently to clarify definitions and administrative procedures. Chris Schutz, chief counsel at CDTFA, explained that the proposal would make software taxable as a tangible good in some circumstances and that existing technology transfer agreement rules would remain relevant for separating intangible from tangible portions of transactions.
The committee pressed officials on how the proposal would treat AI products and where the line falls between taxed and untaxed digital goods. Schutz said products that fit the definition of mass-market prewritten software would be subject to tax, and that services bundled with software would generally remain untaxed unless separately itemized and taxable.
Several members asked for the trailer bill language and additional data to be shared with the committee before final decisions. The committee closed debate without a vote and requested the draft trailer bill for review.
