California Assembly Passes Bills to Tax Digital Software and Health Insurance Premiums

SACRAMENTO — The California Assembly passed a package of significant tax-increase bills on Monday that would impose a new sales tax on digital software and restructure a tax on health insurance premiums. The measures, part of a broader budget agreement between legislative leaders and Governor Gavin Newsom, now advance to the state Senate, where a vote is expected this week.

The proposals are central to the Democratic supermajority's plan to address the state's fiscal challenges and generate new revenue. First introduced by Gov. Newsom in his May budget revision, the tax changes were adopted by legislative leadership last week as part of a $356 billion state budget framework. Lawmakers aim to finalize the budget with the governor within the next two weeks, ahead of the state's constitutional deadline of June 15.

For California business owners, these proposals add another layer of complexity to an already challenging tax landscape. The new sales tax on software-as-a-service (SaaS) platforms like Slack or Microsoft Suites is not just another line item; it will directly impact budgeting, procurement, and accounting processes for companies of all sizes. We've seen how sudden tax changes can disrupt financial planning, forcing businesses to re-evaluate their technology stack and operational expenses. Furthermore, extending the cap on R&D tax credits could disproportionately affect the innovative small and mid-sized companies that rely on these incentives to fund growth. This is precisely the kind of development that requires proactive financial strategy. Our expertise in tax preparation and compliance helps businesses navigate these shifts, ensuring they understand the new liabilities and can adjust their financial models accordingly. To get ahead of these changes, business owners can contact C&S Finance Group LLC at csfinancegroup.com to assess their potential exposure.

At the core of the new revenue plan is the extension of the state’s sales tax to cover electronically delivered or remotely accessed software. According to budget trailer bills SB 122 and SB 176, this tax would take effect in 2027. This marks a significant policy shift for California, which currently taxes software sold on tangible media but generally exempts cloud-based SaaS products. The change would mean that monthly or annual subscription fees for a wide range of essential business tools would now be subject to state sales tax, increasing the cost of doing business for nearly every company in the state.

In addition to the software tax, the legislative package extends and modifies a cap on corporate tax credits. The current limitation on business credits, which was set to expire after 2026, would be extended through 2029. The proposals then outline new caps beginning in 2027 or 2030, which would limit the amount of tax credits a business can claim against its liability. The research and development (R&D) credit is a primary target of this change. The state estimates that by 2029, this measure could raise as much as $4.5 billion annually.

The technology and biotech sectors have voiced fierce opposition to the proposals. Industry advocates argue that tax incentives for research and development are critical for fostering the expensive, long-term innovation that has long been a hallmark of California's economy. They warn that increasing the tax burden on software and limiting R&D credits could make the state less competitive and stifle investment in new technologies.

The legislative package also includes a restructuring of the state's tax on managed care organizations (MCOs), which is expected to result in higher health insurance premiums for families and employers. Proponents of the measure, including Senator John Laird, who chairs the Budget and Fiscal Review Committee, have framed the change as a necessary response to federal requirements that mandated a new program structure. According to Sen. Laird, the changes are part of a “balanced approach” to protect essential services while addressing the state's fiscal issues.

The bills passed the Assembly on Monday evening along party lines, with the Democratic supermajority overpowering unified Republican opposition. Senate President Pro Tempore Monique Limon defended the tax increases as a necessary compromise. “We have, in this moment, to make some decisions that will generate revenue very quickly,” she told reporters.

Republicans, however, argue that the tax increases will harm California's residents and business climate. “This budget is a reflection of the majority's values,” said Assemblymember David Tangipa in a statement. “If you're a hard-working Californian or a business owner, your taxes are going up. If you pay for private insurance, your bill is going up.”

The legislation now moves to the state Senate for consideration. Given the Democratic control of the chamber, the bills are widely expected to pass. From there, final negotiations with the governor's office will determine the exact language and implementation details that will be signed into law as part of the state budget.