Jun 4, 2026 · 5 min · 8 segments
This week we're covering a budget proposal to tax electronic digital products and services, and the questions this proposal raises.
Although California is coming a little late to the game in proposing to expand its sales and use tax base to cover the sale of digital pre-written software products and software as services, if enacted, Governor Newsom's budget proposal to begin taxing these products and services would commit California in a big way.
According to the Legislative Analyst's Office, if enacted, the proposal could result in the imposition of over two billion dollars in additional taxes per year and would be imposed against both businesses and direct consumers.
As the economy has shifted away from a tangible personal property base, it's not surprising that California, as well as the majority of other states, including New York, Texas, and Washington, are moving to tax software delivered electronically.
If enacted, California would tax these purchases of software whether they're purchased directly on a disk, delivered electronically, such as through downloads, as part of embedded software in various goods, such as computers, coffee pots, et cetera, or as a service delivered over the cloud, also known as software as a service, for example, Zoom, Dropbox, Slack, et cetera.
Instead, the governor's approach focuses more on purchases made by businesses.
Examples include customer tracking software like Salesforce, payroll and human resource software management services, and most importantly for our industry, tax preparation and financial planning software.
To date, no legislation has been officially introduced, although draft language of taxation of digital pre-written software is available on the California Department of Finance's Trailer Bill Language webpage under the heading Forecasting.
If enacted as proposed, it would be effective beginning January first, twenty twenty-seven.
Many lobbyists are warning businesses to begin evaluating their software usage now and prepare themselves for a seven point two five percent to eleven point two five percent increase in their purchase costs to cover the additional state and local sales and use taxes that they may have to pay if this proposal is enacted.
Although California is coming a little late to the game in proposing to expand its sales and use tax base to cover the sale of digital pre-written software products and software as services, if enacted, Governor Newsom's budget proposal to begin taxing these products and services would commit California in a big way.
According to the Legislative Analyst's Office, if enacted, the proposal could result in the imposition of over two billion dollars in additional taxes per year and would be imposed against both businesses and direct consumers.
As the economy has shifted away from a tangible personal property base, it's not surprising that California, as well as the majority of other states, including New York, Texas, and Washington, are moving to tax software delivered electronically.
If enacted, California would tax these purchases of software whether they're purchased directly on a disk, delivered electronically, such as through downloads, as part of embedded software in various goods, such as computers, coffee pots, et cetera, or as a service delivered over the cloud, also known as software as a service, for example, Zoom, Dropbox, Slack, et cetera.
Instead, the governor's approach focuses more on purchases made by businesses.
Examples include customer tracking software like Salesforce, payroll and human resource software management services, and most importantly for our industry, tax preparation and financial planning software.
To date, no legislation has been officially introduced, although draft language of taxation of digital pre-written software is available on the California Department of Finance's Trailer Bill Language webpage under the heading Forecasting.
If enacted as proposed, it would be effective beginning January first, twenty twenty-seven.
Many lobbyists are warning businesses to begin evaluating their software usage now and prepare themselves for a seven point two five percent to eleven point two five percent increase in their purchase costs to cover the additional state and local sales and use taxes that they may have to pay if this proposal is enacted.
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