Gavin Newsom proposes a California digital software tax

• California Gov. Gavin Newsom wants to ensure that the state’s sale tax applies to digital software.
• Newsom said it isn’t fair that someone has to pay sales tax for an in-person purchase but not for a download.
• If passed, the tax could be another blow to already reeling software and SaaS companies.

California could deliver a big blow to already reeling SaaS and software companies.

On Thursday, Gov. Gavin Newsom proposed expanding the state sales tax to ensure it covers digital prewritten software. Newsom, whose term ends in January, said he had been “slow” to recognize that consumers were paying a 7.25% sales tax when they buy software in a store but not when they buy it online.

“As someone who lives near a Best Buy, I’m at Best Buy often,” Newsom told reporters during a news conference. “And I’m paying sales tax on a lot of this prewritten software. And then I find out that all my friends that aren’t near a Best Buy, they’re downloading and they are not paying sales tax. How is that fair?”

Companies like Microsoft and Salesforce could be significantly affected by the tax. Newsom’s proposal comes after the SaaSpocalypse, the significant Wall Street sell-off that hit software companies amid fears that generative AI models and vibe coding could replace their products and services.

Newsom’s proposal would have to be approved by the California legislature. He called for state lawmakers to make the new tax effective January 1, 2027. Newsom said 35 other states already tax digital prewritten software, and 24 states have a SaaS tax.

“By the way, 75% of those transactions we estimate are business-to-business. “75%. That’s why we’re not doing streaming,” he said, adding that the state legislature might feel differently about taxing streaming services.

According to Newsom’s office, the proposed tax is estimated to bring in $450 million in this budget year and $900 million in subsequent years for the state’s general fund. Additionally, it is estimated to generate $560 million in local tax revenues in this budget year and $1.1 billion in subsequent years.

Altogether, Newsom proposed a $350 billion spending plan that would leave the state without a budget deficit for two years. Newsom is widely viewed as a potential 2028 Democratic presidential candidate.