Newsom's new software tax punitive, out-of-touch
.jpg){kind=link}
Newsom's Software-as-a-Service products tax, part of his new budget and set to take effect January 1, 2027, is divorced from business reality. Marc Joffe explains in the Orange County Register.
The governor projects the new tax will raise $450 million for the General Fund in its first partial year and $900 million annually thereafter, with another $1.1 billion flowing to local governments each year at full implementation. In a revision otherwise defined by caution, this is a significant new burden on a struggling industry.
Newsom’s argument for the tax is rooted in competitive fairness. He noted at his press conference that 35 of the 45 states with a statewide sales tax already tax digitally delivered prewritten software, and 24 tax. Software-as-a-Service (SaaS). His preferred illustration was personal: as someone who lives near a Best Buy, he said, he pays sales tax on boxed software while his friends who download the same programs pay nothing. How is that fair, he asked?
That anecdote may sound good, but it is totally divorced from modern reality. Hardly anyone buys software on disks at Best Buy anymore. And that has nothing to do with tax incentives: it’s just easier and cheaper for software companies to sell their products online. In fact, there are no mainstream laptops sold today with built-in optical disc drives.
The image of Californians streaming into Best Buy to purchase boxed software that their neighbors download tax-free belongs to a previous decade. Whatever competitive distortion The companies that would actually pay this tax, enterprise SaaS vendors, cloud analytics platforms, and AI-powered productivity tools (if their providers cannot litigate their way out of collecting the tax), have never sold a product on a shelf.
The proposal’s more serious problem is its timing. The SaaS industry is not in a position to absorb a new cost burden. What analysts have taken to calling the SaaSpocalypse has erased roughly two trillion dollars in software sector market capitalization in February, as investors concluded that AI agents capable of erforming tasks that once required dedicated subscriptions pose a structural threat to the traditional per-seat software model.
The median valuation multiple for public SaaS companies has fallen from pandemic highs of over eighteen times revenue to less than five times today. Growth rates have decelerated, and enterprise customers are consolidating vendors and scrutinizing renewal costs with new intensity.
A new 7.25 to 11.25 percent sales tax (depending on locality) imposed on SaaS subscriptions leaves vendors with three bad options: pass the cost to customers who are already reconsidering their software spend, absorb it into margins that are already compressed by rising AI infrastructure costs, or restructure contracts to reduce California taxable revenue. None of those outcomes serve the workers whose jobs depend on these companies remaining competitive.
Newsom is right that California’s tax code should reflect the modern economy. But updating the tax code to address a no-longer-relevant disparity, at the expense of an industry fighting for survival in the economy of 2026, is not reform. It is an obstacle at the worst possible moment.
Read the whole thing here.
Marc Joffe is a Visiting Fellow at the California Policy Center.
Follow Opportunity Now on Twitter @svopportunity
We prize letters from our thoughtful readers. Typed on a Smith Corona. Written in longhand on fine stationery. Scribbled on a napkin. Hey, even composed on email. Feel free to send your comments to us at opportunitynowsv@gmail.com or (snail mail) 1590 Calaveras Ave., SJ, CA 95126. Remember to be thoughtful and polite. We will post letters on an irregular basis on the main Opp Now site.