Here’s the thing about California tax policy: it has a way of sneaking up on you through your monthly subscriptions. Come July 1st, the state will begin collecting a brand-new tax on digital software as a service—the stuff you probably use every single day without thinking about it.
Microsoft Office. QuickBooks. Slack. Workday. Apps like these will now be subject to a 7.25% tax at minimum, potentially climbing over 10% depending on where you live in the state. On its face, that sounds manageable. But the real problem, according to David Klein, vice president of research and communication for Cal Tax, is far more insidious: tax pyramiding.
Think of it this way. A farmer uses agricultural software. A trucking company uses logistics software. A grocery store uses inventory software. A marketer uses ad-targeting software. Then you—the consumer—walk in and buy your groceries. That software cost at every single step of the supply chain gets taxed. And then gets passed along to you. So when lawmakers say this modernizes California’s tax system by moving from taxing physical software discs to digital services, Klein counters with a sharper point: just because something is new doesn’t mean the state has to tax it.
The numbers matter here, too. California projects this will bring in around $900 million to $2 billion annually. Klein and the coalition of businesses opposing the measure—including major tech names like Apple, Intuit, and Fidelity—think the actual cost to consumers could be five to six times that. We’re talking $6 billion to $12 billion when the tax pyramiding effect ripples through the entire economy.
The speed this was pushed through is also raising eyebrows. The governor announced this a month ago, and within weeks it was fast-tracked through the legislature with minimal public vetting. Opponents got roughly two minutes of testimony here and there. Compare that to the typical tax policy process, and you can see why business groups are worried about unintended consequences that nobody fully mapped out before signing it into law.
Klein isn’t ready to accept defeat, though. The legislative session runs through September, and he’s hoping there’s still time to convince lawmakers to scale back the damage. Whether that happens depends on whether legislators are willing to revisit what many see as a rushed decision made during California’s ongoing affordability crisis.
About the Author
Andrew Johnson
Andrew Johnson is a contributor to LocalBeat, covering local news and community stories.
