What is California proposing regarding prewritten software sales tax?

California Governor Gavin Newsom proposed expanding the state’s sales tax rules so that all sales of prewritten, or “canned,” software would become taxable regardless of how the software is delivered.

When would the new California software tax rules take effect?

If the proposal is adopted, the expanded sales tax rules for prewritten software would take effect on January 1, 2027.

Is custom-developed software taxable in California under the proposed rules?

No. The proposal does not change the tax treatment of custom-developed software, which would remain non-taxable under current California rules.

How much revenue is California expected to generate from the software tax expansion?

California expects the proposal to generate around USD 450 million in General Fund revenue and USD 560 million in local sales tax revenue during the second half of the 2026–27 fiscal year. From fiscal year 2027–28 onward, annual revenues are projected to reach approximately USD 900 million for the General Fund and USD 1.1 billion for local governments.

Could California expand sales tax to other digital products in the future?

Yes. The article suggests that California may eventually broaden its sales and use tax rules to cover additional digital products such as e-books, music, movies, and streamed or downloadable content.

California Sales Tax Expansion for Prewritten Software

Q: What types of software would be taxed under the proposal?

The proposal would apply to prewritten software delivered through downloads, cloud-based access, subscriptions, and physical media such as disks or drives.

California Governor Newsom proposed expanding the state’s sales tax rules to cover all sales of prewritten, or “canned,” software. If adopted, the measures will take effect on January 1, 2027. Because it would apply for only half of the 2026–27 fiscal year, the administration expects it to generate around USD 450 million in General Fund revenue and about USD 560 million in local sales tax revenue during that period.

From fiscal year 2027–28 onward, the state expects to raise approximately USD 900 million annually for the General Fund and approximately USD 1.1 billion annually for local governments.

The Scope of Proposed Rules

In the US, sales tax generally applies to tangible, or physical, goods. However, states adopted different approaches to defining “tangible” and to the extent to which they extend sales taxes to digital products and services. California is one of the states that took a narrower approach, especially when it comes to software taxation.

Under the current California rules, sales tax applies to prewritten software only when it is delivered on physical, tangible media such as disks or drives. With the latest proposal, Governor Newsom aims to expand the state’s sales tax rules to include all sales of prewritten software, such as those delivered through downloads, cloud-based access, subscriptions, or physical media.

Other types of software sales, including custom-developed software, downloaded prewritten software, and software accessed remotely through the cloud or subscription services, are, and will remain for now, non-taxable.

Conclusion

Once enacted, the proposal would address one notable inconsistency in California's sales tax system by ensuring that prewritten software is taxed regardless of how it is delivered. That said, it is limited to software, leaving many differences between digital and traditional products unresolved. It is therefore reasonable to expect that California's sales and use tax rules will be broadened further in the near future to cover products such as digital books, music, movies, and other downloadable or streamed content.

Source: Legislative Analyst's Office