California Gov. Gavin Newsom announced his latest budget plan on Thursday, totaling $349.4 billion, the largest in the state’s history. The proposal includes a new 7.25% state sales tax on cloud-based software.
Currently, sales tax is only paid on software purchased in physical form, whether that’s through software sold as part of a new hardware purchase or tangible media. Cloud-based software and software as a service (SaaS) applications aren’t taxed in the same way, but Newsom’s proposal would change that.
As KCRA notes, the new tax would apply to software like Microsoft Office, Adobe, and QuickBooks, as well as Slack and Workday. Roughly half of the states currently tax SaaS products, and Newsom argues it would just mean bringing California in line with dozens of other states.
Over the past three years, the state of California brought in $16.5 billion more than it had anticipated, largely credited to soaring tax revenue from the seemingly unstoppable stock market and technology sector. The Dow Jones Industrial Average closed up over 300 points at 50,063 on Thursday, retaking the 50,000 mark and nearing the record high of 50,188 achieved on Feb. 10. The S&P 500 and Nasdaq closed at record highs on Thursday.
If enacted, the new tax would begin Jan. 1, 2027, and Newsom believes the new tax on software would bring in about $1.1 billion in state and local tax revenue during the first year, according to Bloomberg. That revenue would rise to $2 billion for each following year, at least according to the state’s estimates.
The tax would have the largest impact on large tech companies, including giants like Microsoft and Oracle. Newsom made the tax personal by claiming that he goes to Best Buy to get software and is paying tax, while other people who buy digital versions of the same software online don’t have to pay it.
“I’m at Best Buy often, and I’m paying sales tax on a lot of this pre-written software, and then I find out all my friends that aren’t near a Best Buy, they’re downloading it, and they’re not paying sales tax. Well, how is that fair?” Newsom said at a press conference Thursday, according to Bloomberg.
Newsom leaves office in January 2027 since he was ineligible to run again after two terms. Californians are already voting in the primary elections, which end on June 2 and will determine the two people who will face off in November’s election.
California is an overwhelmingly blue state, but there’s concern among Democrats that the two Republicans in the race could wind up together on the ballot. The state has a so-called jungle primary, which means that the two top vote-getters in the primary appear on the general election ballot, regardless of party affiliation. Right now, there are so many Democrats competing that the two Republicans, Steve Hilton and Chad Bianco, are polling quite well and could conceivably be the only two choices.
The Democrats in the race include billionaire Tom Steyer, former HHS Secretary Xavier Becerra, former Rep. Katie Porter, and San Jose mayor Matt Mahan. Right-wing money in Silicon Valley has put its weight behind Mahan, who touts himself as a centrist who’s just here to solve problems. But based on the latest polling, it appears Becerra, Steyer, and Hilton are leading the pack.
