The ongoing boom caused by the AI hype is bringing an unexpected amount of money into California’s state treasury. But for Governor Gavin Newsom, this is no reason to rest. On the contrary: The Democratic politician is planning a fundamental reform of tax law, which is likely to hit the tech industry in Silicon Valley particularly hard. With his revised budget draft for 2026/27, Newsom proposes the introduction of a sales tax on cloud-based software. In doing so, he wants to hold the tech sector accountable in order to secure billions in additional revenue for the world’s fifth largest economy.
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The initiative is part of the regular revision of the budget, which traditionally takes place in May. Specifically, sales of software that is made available via the Internet will in future be subject to a basic tax rate of 7.25 percent. Since local municipalities can impose their own surcharges, the actual burden in many regions of California is likely to be even higher.
Large software houses such as Microsoft, Salesforce and Oracle would primarily be affected by the new regulation, but also the growing number of providers of AI applications. These usually sell their services via the cloud. The government in Sacramento calculates that the new levy would bring in around $1.1 billion in state and local tax revenue in the coming fiscal year. In the following years, this amount is expected to level off at around two billion US dollars annually.
Until now, California has been an exception when it comes to software purchases: Sales tax is normally due when purchasing physical data storage media in an electronics store or when purchasing a new computer with pre-installed programs. Online purchases via the cloud, however, remained tax-free. Newsom justified his change of heart with a personal anecdote while shopping in a brick-and-mortar store. Some other US states have already introduced a cloud tax.
Streaming platforms for media content such as Netflix or Disney+ should be exempt from the California regulation since the majority of taxable transactions take place in the business-to-business sector anyway.
A global trend?
At the same time, EU MPs are also pushing for a billion-dollar tax on Big Tech. With an ambitious financial plan for the years 2028 to 2034, the EU Parliament is calling for tech giants to pay up. The aim is to increase the EU budget and secure important future investments. The US government under Donald Trump doesn’t like this. The fact that California – the home base of the affected giants – is now pushing ahead with its own digital levy gives the debate a piquant note.
Newsom’s initiative comes at an opportune time for California’s budget planning. The Golden State’s budget is currently in great shape because revenue has exceeded previous forecasts by $16.5 billion. There is no threat of a deficit for the next two years. However, the windfall is heavily dependent on the volatile income from capital gains tax and the share profits of the tech elite. This makes the West Coast state’s budget vulnerable to price fluctuations on the stock exchanges.
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Local governments are also under pressure from federal cuts resulting from Trump’s “One Big Beautiful Bill Act.” According to Bloomberg, Newsom, who is in the last year of his term in office and is said to have ambitions to run for president in 2028, wants to take advantage of the opportunity to secure his party’s social and climate programs in the long term.
Hope for IPOs
In addition to the software tax, the administration is planning a permanent limit on tax benefits for companies from the tax year 2027, which should bring millions more into the coffers. At the same time, California is hoping for a number of spectacular IPOs from the region. The expected IPOs of industry giants such as Anthropic, OpenAI and SpaceX are considered potential gold mines, as the realization of stock gains by employees and investors would lead to massive tax back payments.
But resistance from the economy is already forming. The California Chamber of Commerce warns against premature moves and points to other far-reaching tax initiatives that will be on the ballot next November. This includes a heavily debated billionaire tax. The executive must now negotiate the final budget plan, including the potential digital tax, with members of parliament in Sacramento by July.
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