The budget trailer bill that contains the provision eliminating California’s sales tax exemption for many digital software products and services (SaaS) was signed into law this week by Governor Gavin Newsom — Senate Bill 122 (SB 122).

As outlined in California’s Credit Unions’ previous message, this new law applies broadly to businesses operating in California, including California state-chartered credit unions, which are subject to California sales and use tax. Federal credit unions (FCUs), however, remain exempt under Section 122 of the Federal Credit Union Act (12 U.S.C. § 1768), which provides broad protection from state and local taxation.

While California was one of only a handful of states that continued to exempt many SaaS products from sales tax, the enactment of SB 122 is nonetheless a disappointing development for credit unions.

To assist credit unions in preparing for these changes, the California league has developed a compliance bulletin outlining the new law and its potential impact. If your credit union has questions regarding implementation or compliance considerations, please contact Lisa Quaranta.

California’s Credit Unions’ message has been clear to legislators, Newsom’s office, and to both the commissioner and deputy commissioner of the California Department of Financial Protection and Innovation (DFPI) during the past several weeks:

• Credit unions are not-for-profit financial cooperatives, and any new tax ultimately reduces resources available to serve members through competitive rates, affordable services, and community investment.
• The legislation creates a disproportionate impact on California state-chartered credit unions, placing them at a competitive disadvantage and weakening California’s dual-charter system.
• This tax represents a departure from California’s longstanding recognition of credit unions as member-owned financial cooperatives that exist to serve consumers — not generate profits for shareholders.
• Prior to the bill’s introduction, the California league submitted an opposition letter and worked with fellow trade associations to strongly oppose the bill.

Although SB 122 has been enacted, California’s Credit Unions’ advocacy efforts are not over. The league will continue engaging with legislators, regulators, and other stakeholders as implementation moves forward and will advocate for solutions that address the unintended consequences for California’s state-chartered credit unions.

If your credit union is considering a charter conversion, please contact Robert Wilson. This information is imperative to pursue any fix for credit unions.

For any other questions, please contact Robert Wilson.