Filed under: Software Solutions, State Local & Multistate Tax
September 24, 2026
Written by Eric Nix.
For more than three decades, California drew a clear line between software you could hold in your hand and software you accessed through a browser. That line is about to disappear. Beginning January 1, 2027, California will apply its sales and use tax to prewritten computer software regardless of how it reaches the customer, and that includes many software-as-a-service (SaaS) subscriptions that have never been taxed before. The shift represents one of the largest expansions of the state’s sales tax base in a generation, and it will touch nearly every company that sells or buys software in California.
What California SB 122 Changes
The change comes from Senate Bill 122, a budget trailer bill that Governor Gavin Newsom signed on June 29, 2026. SB 122 amends California’s definition of tangible personal property to include a “digital product,” defined as prewritten computer software transferred on physical media, delivered electronically, or accessed remotely. In plain terms, the delivery method will no longer decide whether tax applies. What matters instead is whether the seller is providing prewritten software that is held for general or repeated sale.
The tax will apply at California’s full rate, which is the 7.25% state base plus any applicable local district taxes. In some jurisdictions, that combined rate can approach or exceed 10%. There is no phase-in period. Prewritten software downloads, licenses, and SaaS subscriptions all move from exempt to taxable on the same date, and with that change California joins more than 20 states that already tax SaaS in some form.
Which Software Products Are Taxable Under California SB 122
The new tax reaches prewritten software specifically, which the statute describes as software held or existing for general or repeated sale or lease, even if it was originally developed on a custom basis. Cloud platforms that a customer reaches through a browser, app, password, or program interface generally fall within that definition.
Exceptions Under SB 122
Several categories stay outside the expanded tax base. Custom software developed for a single customer remains exempt, and when a prewritten product is modified for one customer, only the separately stated modification may qualify for exempt treatment.
The law also carves out digital assets such as cryptocurrency, along with digital books, digital music, streamed audio and video, and digital video games. Digital infrastructure, meaning the cloud platforms on which customers deploy and run their own software, is likewise excluded under certain conditions. Bundled offerings and configurable platforms will require a closer, fact-specific review.
What the Tax Means for Software Providers
For sellers, the most immediate concern is knowing where a sale takes place. SB 122 sources remote sales of electronically delivered software to the purchaser’s known California address, applied through a priority order that starts with the billing address and then moves to the shipping or delivery address, the address tied to the payment instrument, and finally the mailing address. If the seller has no California address on file, the sale may be treated as occurring outside the state. Therefore, billing address data becomes a compliance input rather than a back-office detail, and any billing system that does not reliably capture and validate customer addresses now has a gap to close.
Providers should also watch a notable exception. When a retailer’s sales of remotely accessed or electronically delivered software to a single purchaser exceed $5 million in a calendar year, the obligation to collect shifts to the purchaser, who must self-assess and remit use tax directly to the state.
What the Tax Means for Software Buyers
Buyers should expect tax charges on subscriptions that were previously exempt, which will raise the total cost of software that many organizations rely on for daily operations. This may affect a broad range of cloud-based platforms, including enterprise resource planning, customer relationship management, and fund accounting solutions such as Sage Intacct.
Large purchasers carry an added responsibility. If a company’s software purchases from a single vendor cross the $5 million annual threshold, that company becomes liable for the use tax and must self-assess and remit it to the California Department of Tax and Fee Administration (CDTFA). Software purchased solely for use outside California, or in interstate or foreign commerce, remains exempt.
Nexus Considerations
Additionally, California’s physical and economic nexus rules still apply. If a seller has under $500,000 in annual California receipts and no physical presence in the state (such as a warehouse, office, or employees), the seller may not have an obligation to collect and remit sales tax to California. In this situation, the tax burden reverts to the purchaser, who must self-assess and remit use tax to the state. Both sellers and buyers need to be aware of their individual responsibilities and obligations under general nexus rules.
How Businesses Can Prepare for the Tax Before 2027
The months before the effective date are the time to prepare. Sellers and purchasers alike should start by identifying which offerings qualify as prewritten software and assessing how they are treated today. From there, a few priorities stand out:
- Review contracts and pricing. Examine how tax clauses, renewal terms, and pricing will change for transactions on or after January 1, 2027.
- Evaluate billing and accrual systems. Confirm that systems can distinguish taxable software transactions across every delivery method and can self-assess use tax where needed.
- Flag the $5 million threshold. Identify any single seller or buyer relationship approaching that annual figure so the right party is prepared to collect or self-remit.
- Monitor CDTFA guidance. Watch for agency guidance that may clarify definitions, sourcing, exemptions, bundling, and transition rules, and adjust before the law takes effect.
Key Takeaways on California’s New SaaS Sales Tax
SB 122 ends California’s longstanding practice of taxing software by its delivery method and replaces it with a focus on whether the product is prewritten software held for repeated sale. The reach is broad, the exemptions are specific, and the compliance details around sourcing and the $5 million threshold leave real questions that further guidance will need to answer.
Companies that sell or buy software in California should not wait for that guidance to begin their review, because the classification, contract, and systems work involved takes time to complete well before the January 1, 2027, effective date.
If you have questions about how SB 122 could affect your software sales or purchases, contact our State and Local Tax team today to help you assess your exposure and prepare for the transition. For companies that rely on cloud-based software platforms such as Sage Intacct, Salesforce, and MIP, our Software Solutions team can help evaluate the operational and budgeting implications of the new rules.