California’s Governor Gavin Newsom proposed a tax on digital prewritten software on Thursday, aimed at creating a level playing field between online and in-store software purchases.
Newsom suggested expanding the state sales tax to include digital prewritten software, noting the unfairness of consumers paying a 7.25% sales tax on in-store software purchases while those buying online aren’t taxed.
Newsom said during a press conference that he frequently shops at Best Buy because he lives nearby. “And I’m paying sales tax on a lot of this prewritten software. And then I find out that all my friends that aren’t near a Best Buy, they’re downloading and they are not paying sales tax. How is that fair?”
The proposal, pending approval from the California legislature, is set to become effective on January 1, 2027. The Governor noted that 35 states already tax digital prewritten software, and 24 states have a SaaS tax.
The proposed tax is anticipated to generate substantial revenue for the state and local budgets. Projections from Newsom’s office suggest the tax could bring in $450 million for the state’s general fund this budget year and double that in subsequent years. It could also generate $560 million in local tax revenues this budget year and $1.1 billion in the following years.
Gavin Newsom proposed a revised $350 billion California budget that eliminates the deficit for this year and next year, while largely avoiding major spending cuts and limiting new spending initiatives.
Proposed Tax Adds To SaaS Worries
The proposed tax comes at a time when the software-as-a-service (SaaS) sector is already facing challenges. Companies such as Microsoft Corp. (NASDAQ:MSFT) and Salesforce.com (NYSE:CRM) could face major impacts from the proposed tax, which follows the "SaaSpocalypse,” a $1 trillion sell-off in software stocks, earlier this year, driven by concerns that generative AI and vibe coding may replace traditional software products and services.
Besides Salesforce, several industry giants like Atlassian Corp. (NASDAQ:TEAM), Zscaler, Inc. (NASDAQ:ZS) and Workday, Inc. (NASDAQ:WDAY) hit 52-week lows.
However, HSBC dismissed fears of a ‘SaaSpocalypse’, predicting that software will benefit from AI's development. The bank also highlighted that it would be neither practical nor cost-effective for companies to rely on AI to build their own in-house software.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Image via Shutterstock
Login to comment