Gavin Newsom Proposes 7.25% California Tax on Digital Prewritten Software

(CALIFORNIA) — Governor Gavin Newsom proposed Governor Gavin Newsom Pours $35 Million to Fight Trump Administration Deportations”>expanding California’s sales tax to cover digital prewritten software, extending the levy to software downloaded online rather than bought in a physical store.

The proposal would apply the state’s 7.25% sales tax to digital software purchases, matching the rate already charged on software sold in stores. Newsom framed the change as a tax policy shift meant to treat the two types of purchases the same way.

His office said the plan would take effect on January 1, 2027, if the California Legislature approves it. Without legislative approval, the proposal would not become law.

Revenue estimates released with the proposal put the gain to the state general fund at $450 million in the current budget year and $900 million in subsequent years. Local governments would receive an additional $560 million in the current budget year and $1.1 billion in subsequent years, Newsom’s office said.

California already taxes software purchased in a store. The proposed change would broaden that treatment to software delivered digitally, a category that now covers a large share of how businesses and consumers buy programs.

Newsom said the gap is unfair because consumers pay sales tax when they buy software in a physical store but not when they download it. The proposal focuses on digital prewritten software rather than software sold in a box on a shelf.

Companies selling software and software-as-a-service products would face the most direct effect if lawmakers enact the measure. The examples cited with the proposal included Microsoft and Salesforce.

That reaches beyond traditional software downloads. The proposal also touches the subscription-based business models that dominate much of the modern software market, where companies sell access to tools and platforms over the internet rather than through one-time physical purchases.

Newsom placed the proposal in a broader national tax framework. He said 35 other states already tax digital prewritten software, and 24 states tax SaaS.

That comparison suggests California is considering a tax treatment that many other states have already adopted in some form. It also gives Newsom a fiscal and policy argument as lawmakers begin reviewing the plan during budget negotiations.

Legislative review now becomes the next step. Lawmakers can approve the proposal, reject it, or amend it before any expansion of the sales tax reaches the governor’s desk.

Any amendments would shape how broadly the tax applies and how sellers must collect it. Businesses that sell digital prewritten software and SaaS products would watch closely for the final definitions, since those details would determine which transactions fall inside the tax base.

The fiscal stakes are large for Sacramento and for local governments. Newsom’s office projected that the state share would double from $450 million in the current budget year to $900 million in later years, while local revenue would rise from $560 million to $1.1 billion.

Those estimates place the proposal among the more visible revenue measures in Newsom’s budget package, even though the basic policy change is narrow: applying the same sales tax rate to digital prewritten software that California already applies to software sold in person.

Businesses would likely weigh whether to absorb the tax, pass it through in pricing, or adjust how they market digital products in California. Consumers and business buyers, in turn, would face a different final price on software purchases that have not carried the state sales tax in the same way.

Nothing changes immediately. The proposal still sits with the Legislature, and the date attached to the plan, January 1, 2027, leaves lawmakers months to debate the scope, the revenue assumptions, and how California wants to tax software sold in a market that has moved steadily from store shelves to online delivery.