Administration outlines digital‑software tax and corporate credit limits as part of May Revision
May 21, 2026 | California State Senate, Senate, Legislative, California
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The Department of Finance presented the revenue portion of the May Revision as a package that includes a sales‑tax expansion to electronically delivered pre‑written software, a permanent limitation on business tax credits, and a short‑term reduction of the first‑year minimum franchise tax for new LLCs and similar entities.
Colby White of the Department of Finance said the pre‑written software proposal would align California with most other sales‑tax states by taxing electronically delivered pre‑written software and many software‑as‑a‑service (SaaS) arrangements beginning Jan. 1, 2027. He said the department estimates General Fund revenue increases in the tens to hundreds of millions (the administration cited ~$45 million in 26‑27 and $900 million in 27‑28 ongoing in testimony) and substantial local revenue gains as well.
White also described a permanent business tax credit limitation to ensure large profitable corporations pay some level of tax: beginning tax year 2027 the cap would be the greater of $5,000,000 or 50% of a corporation’s pre‑credit tax liability, with certain exclusions (for example, the low income housing credit). The department estimated large fiscal gains from that change.
The administration additionally proposed reducing the first‑year minimum $800 tax for newly formed LLCs/LPs to $400 for tax years 2027–2029 to reduce startup costs for small businesses; LAO warned of windfall registrations and modest effects on real new economic activity.
LAO analysts recommended consideration of policy modifications: broader digital product coverage or narrower exemptions for the software tax, an exemption or reduced rate for business‑to‑business software purchases, and careful evaluation of the R&D credit’s role under the proposed credit cap. Stakeholders from life‑sciences and biotech sectors urged the committee to reject a permanent cap on the R&D credit, arguing it could damage innovation incentives.
The subcommittee took public comment and held the items open for further drafting and analysis.
Colby White of the Department of Finance said the pre‑written software proposal would align California with most other sales‑tax states by taxing electronically delivered pre‑written software and many software‑as‑a‑service (SaaS) arrangements beginning Jan. 1, 2027. He said the department estimates General Fund revenue increases in the tens to hundreds of millions (the administration cited ~$45 million in 26‑27 and $900 million in 27‑28 ongoing in testimony) and substantial local revenue gains as well.
White also described a permanent business tax credit limitation to ensure large profitable corporations pay some level of tax: beginning tax year 2027 the cap would be the greater of $5,000,000 or 50% of a corporation’s pre‑credit tax liability, with certain exclusions (for example, the low income housing credit). The department estimated large fiscal gains from that change.
The administration additionally proposed reducing the first‑year minimum $800 tax for newly formed LLCs/LPs to $400 for tax years 2027–2029 to reduce startup costs for small businesses; LAO warned of windfall registrations and modest effects on real new economic activity.
LAO analysts recommended consideration of policy modifications: broader digital product coverage or narrower exemptions for the software tax, an exemption or reduced rate for business‑to‑business software purchases, and careful evaluation of the R&D credit’s role under the proposed credit cap. Stakeholders from life‑sciences and biotech sectors urged the committee to reject a permanent cap on the R&D credit, arguing it could damage innovation incentives.
The subcommittee took public comment and held the items open for further drafting and analysis.
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