Newsom proposes sales tax on digital software to raise millions for California

California Gov. Gavin Newsom is proposing a new tax on digital software and software-as-a-service purchases, a move that could bring in hundreds of millions of dollars a year as the state tries to balance its budget and capture more revenue from the technology sector. The proposal, unveiled Thursday as part of his revised 2026-27 budget, would extend California’s sales tax to cover digital prewritten software, including cloud-based products, and would need approval from the state legislature before taking effect.

Newsom framed the change as a matter of fairness, saying it makes little sense for Californians to pay sales tax on software bought in a store but not on a download. According to Business Insider, he said he had been “slow” to recognize the gap in the tax code. His office estimates the measure would raise $450 million for the state general fund in the coming budget year and $900 million in later years, while also generating additional local tax revenue.

The proposal comes as California enjoys an unexpected revenue boost linked in large part to the stock-market gains of artificial intelligence companies. As reported by Bloomberg and the Los Angeles Times, that windfall has helped Newsom narrow the state’s deficit and present a $349.9 billion budget plan that avoids broad-based tax increases or major cuts to core programs. Instead, the governor is leaning on targeted business taxes and other fiscal changes to shore up state finances and leave a cushion for his successor.

The software tax could affect major technology companies and the fast-growing software industry more broadly, including firms that sell cloud services and subscriptions rather than boxed products. Business Insider noted that companies such as Microsoft and Salesforce could feel the impact. The proposal also arrives at a sensitive moment for the sector, which has been under pressure from investor concerns that artificial intelligence tools may reshape or even replace some traditional software products and services.

Newsom said California would be joining a growing number of states that already tax digital software, arguing that 35 other states tax digital prewritten software and 24 impose some form of tax on software-as-a-service. He also suggested the state would not move immediately into taxing streaming services, saying those transactions could be treated differently by lawmakers. Under his plan, the tax would begin on January 1, 2027, if approved.

The broader budget proposal also includes limits on corporate tax credits and other revenue measures aimed at addressing the state’s long-term finances. The California Budget & Policy Center praised the digital software tax as a step toward reducing inequities in the tax code, while noting that large, profitable corporations still receive significant tax breaks. For Newsom, the proposal is both a budget tool and a political signal as he prepares to leave office, showing that California’s improving finances are being used to strengthen the state’s fiscal position rather than simply expand spending.