Sales and use tax rate increases will take effect October 1 in Los Angeles County and 65 cities, the California Department of Tax and Fee Administration notified retailers, adding to the cost of living in the state’s most populous region and other areas.
The increases are taking effect just before the state’s major expansion of the sales tax base. Under SB 122 (authored by the Senate Budget and Fiscal Review Committee, chaired by Senator John Laird), the sales tax will be imposed on digital products, including electronically delivered software and Software-as-a-Service, beginning January 1.
This week, the CDTFA held an interested parties meeting with nearly 130 stakeholders to discuss proposed draft regulations to implement the new software tax. CalTax raised concerns during the meeting that California’s approach to implementing this new tax varies greatly from other states that impose a similar tax and said changes to the draft regulations are needed to ensure that the state protects its innovation economy.
The Los Angeles County tax rate will increase to 10.25 percent next month, up from the current 9.75 percent, but the rates in cities within the county are much higher – climbing to 11.25 percent in 16 cities (Azusa, Bell Gardens, Calabasas, Commerce, Compton, Covina, Culver City, Gardena, Glendora, Irwindale, Lynwood, Pico Rivera, San Marino, Santa Monica, South El Monte, and South Gate), 11.5 percent in Santa Fe Springs, and 11.75 in Lancaster and Palmdale.
The only two October 1 increases outside of Los Angeles County are in the cities of Perris (Riverside County) and Red Bluff (Tehama County), where the voters approved 1 percent increases that will bring the rates to 8.75 percent and 8.5 percent, respectively.
The Legislature and governor have waived the state’s 2 percent cap on local sales tax rates in many areas of California – including those with the largest populations of taxpayers – so many areas have rates far above the 9.25 percent maximum that would be in effect if the cap were kept in place.
The projected cost of SB 122 for taxpayers has been a question mark since the software tax was proposed in mid-May by Governor Gavin Newsom and rushed through the legislative process without review by a tax policy committee. The Department of Finance estimated that the tax would cost taxpayers approximately $2 billion per year (composed of roughly $900 million in state tax and $1.1 billion in local tax), but a study commissioned by the Silicon Valley Tax Directors Group estimated that the cost would be anywhere from $2.8 billion to $6.3 billion a year, and others have privately cited significantly higher estimates.
The Legislative Analyst’s Office reported in May that the Newsom administration’s revenue estimates for the software tax are “reasonable,” but added: “As is typical for revenue proposals, however, they are subject to substantial uncertainty. The actual amount for 2027-28 plausibly could turn out to be hundreds of millions of dollars higher or lower than projected. For 2026-27, we see a bit more downside risk due to potential acceleration of software purchases to avoid the new tax. For the out-years, we see a bit more upside due to likely growth in the industry.”
Additional taxes may be on the way. There are 61 local sales tax increases on the November ballot, potentially adding significantly to the state’s affordability problem.
As the Washington, D.C-based Tax Foundation notes, sales taxes are regressive, even with California’s exemptions for some foods, specified medicines, and other items.
“Consumption taxes, such as sales taxes, result in a regressive tax burden even though they typically apply the same tax rate to all taxpayers,” the Tax Foundation explained. “For example, if two taxpayers both spend $10,000 throughout the year on goods that face a 5 percent sales tax, they will have both paid $500 in sales tax that year. But if the first taxpayer has an annual income of $30,000 and the second taxpayer has an annual income of $50,000, the sales tax creates a larger percentage burden on the lower-income taxpayer (1.7 percent) than the higher-income taxpayer (1.0 percent). … In the real world, households of different income levels don’t typically have the same levels or types of consumption. Instead, lower-income households tend to consume a larger share of their incomes than higher-income households, and they tend to consume goods that face higher levels of tax.”
Under the California Constitution, local tax increases cannot take effect without voter approval. Many of the more than 270 local tax measures on the November ballot demonstrate techniques that local governments frequently use to encourage support for tax increases, including the use of biased ballot questions and “educational outreach” designed to persuade residents to vote “yes.”
The courts can order changes in ballot language to address bias, while the state’s Fair Political Practices Commission investigates the use of tax dollars to campaign for measures.