Gov. Gavin Newsom is going after Silicon Valley with a sweeping proposal to expand the state’s sales tax into cloud software, AI platforms and digital applications — a move projected to generate more than $1 billion in its first year and reshape how the digital economy is taxed.

The plan does not create a new standalone surcharge, it broadens California’s existing sales tax system so it applies more consistently to software products sold online.

The state’s base sales tax rate is 7.25%, with local taxes able to push the total higher depending on where a buyer is located.

At the center of the proposal is “prewritten computer software” and Software-as-a-Service products, particularly enterprise tools used by businesses and large organizations.

The administration has explicitly excluded digital entertainment streaming services such as Netflix and Spotify from the new tax rules.

Newsom has framed the effort as closing a fairness gap in the tax code. He pointed to a discrepancy in how software is taxed depending on how it is purchased.

“I’m at Best Buy often, and I’m paying sales tax on a lot of this pre-written software, and then I find out all my friends that aren’t near a Best Buy, they’re downloading it and they’re not paying sales tax. Well, how is that fair?” Newsom said during Friday’s press confrence.

The governor’s office says the majority of the impact will fall on business-to-business software transactions, which account for roughly 75% of the projected economic effect.

Still, some consumer-facing subscriptions could see higher costs if the proposal becomes law.

That includes widely used platforms such as Microsoft 365, Adobe Creative Cloud, Slack, QuickBooks Online and enterprise AI systems.

Premium consumer subscriptions tied to productivity and AI tools could also be affected, depending on how the final rules are written.

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California officials estimate the proposal would raise about $1.1 billion in combined state and local revenue in the upcoming fiscal year, rising to roughly $2 billion annually over time.

The push comes as California’s budget outlook has strengthened significantly, with revenues running $16.5 billion above earlier projections and eliminating projected deficits for the current and next fiscal years.

Despite the windfall, the revised budget avoids major new spending increases and largely steers clear of deep cuts.

Alongside the software tax expansion, Newsom’s budget proposal also includes a reduction in the first-year filing tax for newly formed limited-liability companies.

California would not be alone in moving in this direction.

More than 30 states already tax digitally delivered software in some form, and more than 20 already apply sales tax to cloud-based SaaS products.

The proposal remains part of ongoing budget negotiations and must be approved by the California Legislature before it can become law.