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By: @Marcus Detwiler

Senate Bill 122, a piece of budget-related legislation signed into law in June, enacted new state tax provisions, including a sales tax on digital prewritten software purchased in California. Special districts and other local agencies will be required to pay this new tax, diverting limited resources from the communities they serve.

Previously, when software was downloaded at the point of sale (rather than obtained on a physical medium like a CD-ROM or USB flash drive), the purchase was exempt from sales tax. Beginning January 1, 2027, SB 122 changes state law to make all purchases of digital software, regardless of delivery method, subject to sales tax. 

The State of California, cities, and counties benefit from the collection of sales tax revenue on   purchases – in contrast to special districts, which generally do not receive sales tax revenue. This means that, while the State, cities, and counties receive revenue that will, in part, offset their cost increases associated with software purchases, special districts will largely be left to absorb the new costs without any corresponding relief. 

Exempt from California’s new sales tax levy is custom software (built for a single client), digital infrastructure/infrastructure as a service (IaaS)/platform as a service (PaaS) cloud computing models, software resale, out-of-state use, and personal/professional services primarily involving human effort (but not standard SaaS accessed via an internet web browser).

CSDA and the Association of California Healthcare Districts (ACHD) have partnered to lead an advocacy effort, in collaboration with other special district association stakeholders and individual special districts, to address the inequitable impact on special districts and the communities they serve. Initial efforts have centered on attempts to secure an exemption for special districts from the application of the sales tax to purchases of digital software. Our advocacy efforts began before SB 122 was signed and continue post-signature.

How Can Special Districts Help CSDA Advocate?

• Join Our Coalition Letter: CSDA previously solicited districts to complete a form authorizing CSDA to include their district among the list of signatories on letters advocating for relief for special districts from the sales tax. That remains an active avenue for districts to assist in this advocacy effort.
• Share the Cost-Impact on Your District:CSDA is also asking special districts to provide their best faith estimates of the anticipated impact of SB 122 (i.e., estimates of the anticipated extra dollar expense the software sales tax would impose) on their agency. Districts that can ascertain these estimates should provide them to CSDA Legislative Representative Marcus Detwiler, along with a brief description of the software purchases that form the basis of the revenue estimate (e.g., SCADA systems, electronic health records, Microsoft Office/365, dispatch management, billing/payment management, GIS, public outreach tools, et cetera). 

In addition to the raw numbers, it would be helpful for you to share anecdotes or examples as to what that amount of money means.  In other words, how many firefighters would that pay for?  How many children would that fund for childcare, camp, or swim lessons?  How much would you have to raise water rates per family?  Anything that can translate the cost to the residents in a meaningful way legislators can understand.

The 2025-2026 State Legislative Session concludes August 31, 2026 and time remains before SB 122 must be implemented. Your partnership and engagement is critical to our ongoing advocacy efforts to address this tax increase on public services, which will further impact affordability in the communities we serve.