California residents and businesses could face higher costs in 2027 after Governor Gavin Newsom signed 2 major tax changes as part of the state budget.
Senate Bill 125 redesigns a tax on managed health plans to preserve funding for Medi-Cal. Senate Bill 122 expands California’s sales and use tax to many types of prewritten software delivered online or accessed through the cloud.
Supporters say the changes protect health care services and modernize tax rules written before software subscriptions became common. Critics warn that health plans and businesses may pass at least some of the additional expense to consumers.
Newsom signed both changes
Newsom signed California’s 2026–27 state budget and related legislation on June 29, 2026. The spending plan included SB 125 and SB 122 among its major revenue and health care provisions.
Both measures could affect affordability, but in different ways. The health plan tax depends partly on federal approval, while the software tax is scheduled to begin on January 1, 2027.
Health plans face a revised tax
SB 125 establishes a managed care organization tax for 2027 through 2029.
The law sets the initial amount at $8.85 per countable enrollee each month for Medi-Cal managed care plans and qualifying full-service commercial health plans. State officials may adjust the rate under conditions contained in the law.
The revised structure was designed to comply with federal rules that generally prevent states from taxing Medicaid plans at higher rates than comparable commercial plans.
Premium increases are possible
The tax is charged to health plans rather than directly to patients during medical visits.
However, insurers can include taxes and administrative expenses when setting future premiums. The Legislative Analyst’s Office estimated that premiums could rise by about 1.5% if plans passed the entire assessment to customers.
The California Association of Health Plans estimated a possible cost of about $100 per insured person annually, or roughly $400 for a family of 4. That is an industry estimate rather than a guaranteed increase for households.
Medi-Cal funding is the goal
California uses the managed care organization tax to support Medi-Cal, the state’s Medicaid program, and obtain federal matching funds.
State finance officials estimated that the redesigned tax could generate approximately $2.3 billion annually. About $2 billion was expected to support existing Medi-Cal services, with roughly $300 million directed toward previously approved increases in provider payments.
The plan still requires federal approval before California can fully use the revised tax structure. Approval was not guaranteed when the bill was enacted.
Software subscriptions become taxable
SB 122 expands California’s sales and use tax to prewritten software transferred electronically or accessed remotely.
Beginning January 1, 2027, qualifying software-as-a-service products will generally be treated the same as prewritten software delivered on physical media. The change could affect accounting, payroll, cybersecurity, design, communication, and office software.
CaliforCalifornia’side base sales tax rate is 7.25%. Local district taxes can raise the final rate depending on where the sale is sourced.
Several digital products remain excluded
The law does not tax every digital purchase or online service.
Custom software prepared for one customer generally remains exempt. Separately stated custom modifications may also avoid tax, although the underlying prewritten program can remain taxable.
Digital books, video games, music, films, cryptocurrency, digital artwork, and certain infrastructure services are specifically excluded from the definition of taxable prewritten software.
Businesses may feel the largest effect
Many taxable software purchases are expected to involve businesses rather than individual consumers.
Companies regularly pay for cloud-based systems used for customer records, payroll, security, communication, data management, and daily operations. They may absorb the tax, cut other spending, or raise prices and service fees.
The state estimates that the software change will eventually generate about $900 million annually for the General Fund and approximately $1.1 billion for local governments.
The actual total will depend on software spending, exemptions, customer locations, compliance, and future regulations.
TL;DR
- Newsom signed SB 125 and SB 122 on June 29, 2026.
- SB 125 creates a revised $8.85 monthly tax per qualifying health plan enrollee.
- Health premiums could rise if insurers pass the tax to customers.
- A family of 4 could face about $400 more in annual costs, according to an industry estimate.
- The health tax is intended to protect Medi-Cal funding and requires federal approval.
- SB 122 taxes many prewritten software downloads and cloud subscriptions beginning January 1, 2027.
- Custom software, streaming media, digital books, video games, and several other digital products remain excluded.
