Taxing the Cloud to Save Public Finances: California Wants to Tap Into the Digital Windfall

In the United States, some products such as downloaded software are taxed in certain states (New York, Tennessee...) but not in others (California, Florida...). California, a major software consumer, plans to change its policy on the matter.

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By Jean Piot

June 23, 2026

5 min

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Illustration de l'article : Taxing the Cloud to Save Public Finances: California Wants to Tap Into the Digital Windfall
Crédit : Jon Tyson

In January 2026, California's Democratic governor Gavin Newsom published a first version of his budget for 2026-2027: $350 billion, including federal aid (for comparison, France's annual budget is €325 billion). This version projected a deficit of $2.9 billion for the current year, followed by another $22 billion deficit the following year.

Meanwhile, the Trump administration cut certain allocations (subsidies for electric vehicle purchases, climate change initiatives, healthcare reimbursements, education funding...) that the state of California must now finance. The governor therefore revised his plan, publishing on May 14, 2026 a new version of the budget... in which the deficits had disappeared.

A miracle? Not really: it simply required acknowledging that revenue had been underestimated. Some tech giants have recently gone public (SpaceX on June 12) or are expected to do so soon (OpenAI, Anthropic). Employees who previously received shares or were able to buy them at a low nominal value will certainly see that value rise at the time of the IPO, as these companies are so coveted by investors. They are thus about to become millionaires.

In California, millionaires pay a great deal of taxes. For example, the state of California collects 12.7% on income of $1 million. This contribution represents a true windfall: estimated at around forty billion dollars, it should be enough to make the deficits disappear.

Taxing software downloaded from the Cloud

Over the longer term, the situation remains concerning: healthcare costs are very high, as are those related to primary and secondary education and the fight against climate change. California has also already experienced several tech bubbles: a first dot-com bubble in 2000, then a second in 2010. Not to mention the subprime crisis in 2008 which, while not exactly a tech bubble, had similar effects.

When these bubbles burst, they triggered layoffs: a large number of employees left Silicon Valley. The taxes California collected on their income therefore declined, as did taxes on purchased goods. Some also see AI as a bubble that, when it bursts, will have similar consequences.

Add to this the fact that Gavin Newsom will almost certainly run in the 2028 presidential election (according to Time Magazine), and it becomes clear that he is doing everything he can to present a positive track record. When revenues are insufficient, the simplest solution is to raise taxes. But what can be taxed in California that isn't already?

California government officials therefore reasoned as follows: any buyer of software stored on a physical medium (CD, USB drive...) in a computer store pays approximately 7.25% in local taxes. This applies for example to Microsoft 365, the Adobe suite, an antivirus, Quicken for personal finance, etc. But if that same user downloads the same software from the cloud, no tax is applied because there is no transfer of physical goods. So why not tax these products as well?

Some notable exceptions

Mindful of voters, the governor excluded streaming applications (such as Netflix), primarily used by individuals. He did however add that this could be revisited at a later date.

Another significant exclusion concerns access to AI platforms such as OpenAI, Anthropic or Google. This should incentivize traditional softwareproviders to use them even more. Suppose a user purchases a Microsoft 365 license that includes Excel: they will pay a 7.25% tax, because Excel's code is pre-written. One could imagine Excel being rewritten so that the user interface remains the same, but complex functions (charts, pivot tables...) are executed through calls to an AI — in this case Copilot, Microsoft's own. In this scenario, the user would pay the same price as today, with the interface being free — and the amount paid would correspond to the AI calls (which are not taxed).

The governor's budget proposal was adopted by the California Senate on June 15, under reference AB/SB 122. However, the budget will not be final until January 1, 2027. In the meantime, various committees will be tasked with refining the wording.

As of that date, individual Californians and California-based businesses that are customers of Microsoft, Adobe, Workday, SalesForce, Oracle, Zscaler, Atlassian, and others will have to pay 7.25% more, which will go into the state budget. According to estimates, this should represent $1 billion in the first year and $2 billion per year in subsequent years: a significant new source of revenue.

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