California sales tax on SaaS and software begins January 1, 2027.
SB 122 treats prewritten software delivered electronically or accessed remotely, including software as a service, as tangible personal property subject to California sales and use tax. The California Department of Tax and Fee Administration is drafting emergency regulations to implement the change.
Yes, beginning January 1, 2027. Under SB 122, California sales and use tax applies to prewritten software transferred electronically or accessed remotely, including SaaS. Subscriptions are taxable for periods on or after that date, regardless of when the contract was signed or invoiced. Infrastructure and platform services are excluded, and CDTFA’s implementing regulations remain in draft.
On June 29, 2026, California enacted SB 122 (Stats. 2026, ch. 23), a budget trailer bill that extends the state’s sales and use tax to prewritten computer software transferred electronically or accessed remotely, including software as a service (SaaS). The amendments to the Revenue and Taxation Code are operative January 1, 2027. On September 1, 2026, the California Department of Tax and Fee Administration (CDTFA) released draft emergency regulations to implement the law. As of the date of this article, the regulations have not been formally proposed and remain subject to change.
The change ends more than three decades of nontaxable treatment for software delivered without tangible storage media. It applies to sales to businesses and consumers alike and will affect software vendors, resellers, and most California businesses that license or subscribe to software. The analysis below is based on the statutory amendments as summarized and quoted in CDTFA’s discussion paper and on the draft regulations.
Background
California taxes retail sales of tangible personal property. Under current Cal. Code Regs., tit. 18, §1502(f)(1)(D), which the drafts would delete, a prewritten program transferred by remote telecommunications was not taxable if the purchaser did not obtain tangible storage media, and software accessed remotely on a vendor’s servers was generally outside the tax. Software and associated patent or copyright interests transferred under a technology transfer agreement were taxed only on the value of any tangible storage media under Nortel Networks Inc. v. State Bd. of Equalization (2011) 191 Cal.App.4th 1259 and Lucent Technologies, Inc. v. State Bd. of Equalization (2015) 241 Cal.App.4th 19.
SB 122 amends Rev. & Tax. Code §6016 to include in “tangible personal property” a digital product and any copyright or patent interests associated with it. It amends the definitions of “sale” and “purchase” in §§6006 and 6010 to include any permanent or temporary transfer of the right to open, view, access, download, copy, update, possess, store, manipulate, or otherwise use a digital product transferred electronically or accessed remotely for consideration. The bill also gives CDTFA emergency rulemaking authority.
| Date | Event |
|---|---|
| June 29, 2026 | SB 122 enacted (Stats. 2026, ch. 23) |
| July 21, 2026 | CDTFA workshop on implementation |
| September 1, 2026 | CDTFA releases discussion paper and draft emergency regulations |
| September 10, 2026 | CDTFA interested parties meeting on the draft regulations |
| September 24, 2026 | Written comments on the drafts due |
| January 1, 2027 | Revenue and Taxation Code amendments become operative |
Taxable Digital Products
New Rev. & Tax. Code §6016.1 defines a “digital product” as prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely. Prewritten software is software held or existing for general or repeated sale or lease, even if it was initially developed on a custom basis or for in-house use. Under §6016.2, software is “accessed remotely” when the purchaser accesses, for consideration, prewritten software that resides on the vendor’s server or the server of a third party. That definition brings SaaS within the tax.
The measure of tax is broad. Under draft Reg. §1600(c)(4), license fees, mandatory maintenance contracts, and other non-optional charges, including consultation charges provided under a mandatory maintenance contract, are included in the measure of tax. Maintenance is mandatory if it must be purchased in order to buy, access, use, or lease the product. The drafts delete the prior rule that taxed 50 percent of a lump-sum optional maintenance contract and do not specifically address optional maintenance under the new regime.
Exclusions and Exemptions
Section 6016.1(b) excludes seven categories from the definition of a digital product. Under draft Reg. §1600(c)(3), the exclusions do not apply when the product is transferred on tangible storage media.
| Generally taxable beginning 2027 | Excluded from “digital product” |
|---|---|
| SaaS and other remotely accessed prewritten software | Digital infrastructure, such as infrastructure as a service and platform as a service |
| Prewritten software downloaded or otherwise transferred electronically | Digital audio works and digital audiovisual works, including streamed music and video |
| Mandatory maintenance and other non-optional charges | Digital books and digital visual works |
| Patent and copyright interests associated with a digital product | Digital video game products and digital assets |
“Digital infrastructure” is a cloud-based service that allows a user to create, deploy, scale, or run the user’s own software on the provider’s platform without managing its own infrastructure. The distinction between a taxable SaaS offering and a nontaxable platform service will therefore turn on whether the customer runs its own software or uses the provider’s.
Several other provisions limit the tax:
- Custom software. Software prepared to the special order of a single customer remains outside the definition of a sale under amended §6010.9. Modifications to prewritten software are treated as custom only to the extent of the modification. Charges for custom modifications are nontaxable if separately stated; a lump-sum charge is taxable in full unless the modification is significant enough that the result qualifies as custom software (draft Reg. §1502.2).
- Services involving human effort. New §6372.1 exempts a service delivered in electronic form that primarily involves the application of human effort originating after the customer’s request. The exemption expressly does not extend to the right to use the provider’s software, whether through a browser, thin client, or programming interface.
- Reproduction rights. The right to reproduce a digital product for distribution to third parties for consideration is exempt under §6362.4.
- Use outside California. Under §6372, a digital product transferred electronically or accessed remotely and purchased solely for use outside California, or in interstate or foreign commerce, is exempt. The seller bears the burden of proof unless it timely takes an exemption certificate in good faith, and a purchaser that certifies the exemption and then uses the product in California is liable for the tax.
- Resale. Sales for resale continue to be supported by a resale certificate.
The amendments also bring prewritten software previously licensed under technology transfer agreements within the tax. Draft amendments to Reg. §1507 provide that tax applies to prewritten computer software, including associated copyright or patent interests, as set forth in Reg. §1600, while the reproduction rights exemption described above continues to apply.
Contracts Spanning January 1, 2027
Draft Reg. §1600(f) provides that a sale occurs when the right to use the product is transferred, regardless of when payment is made or the product is used. A subscription is treated as a continuing sale and purchase, and tax applies to subscription periods on or after January 1, 2027, regardless of when the contract was signed or invoiced. The draft illustrates the rule with the following examples:
| Facts | Result under the draft |
|---|---|
| Payment made December 15, 2026; access begins January 1, 2027 | Taxable |
| Agreement signed December 15, 2026; payment and access in 2027 | Taxable |
| Access granted December 15, 2026; payment made January 1, 2027 | Not taxable |
| Product sold and accessed December 15, 2026 under a 12-month financing plan | Not taxable |
| Subscription with periods before and after January 1, 2027 | Taxable for periods on or after January 1, 2027 |
Prepaying a 2027 subscription in 2026 therefore does not avoid the tax. Subscription commitments entered into before 2027 become taxable for subscription periods on or after January 1, 2027, while a one-time transfer of the right to use completed before 2027 is not taxable even if payments continue into 2027. Vendors and customers should review whether existing contracts allocate responsibility for sales and use tax.
Sourcing and Multiple Points of Use
Amended Rev. & Tax. Code §6010.5(b) sources the sale of a digital product that is not delivered on tangible storage media or sold in person to the purchaser’s California address shown in the seller’s records maintained in good faith in the ordinary course of business. Where several addresses are available, the order of priority is the billing address, the shipping or delivery address, the address associated with the payment instrument, and the mailing address. If the seller has no California address for the purchaser, the sale is deemed to occur outside California, and §6054 relieves a retailer that made a reasonable effort to obtain an address. Local and district taxes follow the same sourcing rule under §§7202.1 and 7254, so the applicable rate is the statewide rate of 7.25 percent plus any district tax at the customer’s location.
For use tax purposes, §6010.5.1 treats a remotely accessed product as used where the person accessing it is located. A product purchased outside California and used in the state within 90 days is presumed to have been purchased for use in California.
Businesses with users both inside and outside California may apportion the tax. Draft Reg. §1600.2 would establish a multiple points of use certificate under which the purchaser apportions the purchase price using any reasonable and consistently applied method. Allocation based on the number of users or computers is presumed reasonable; allocation based on server location is not.
Under draft Reg. §1600(c), sales tax applies only when the place of sale is in California and a California place of business of the retailer participates in the sale, which requires genuine physical human interaction with the sale from that location. Otherwise, use tax applies to the storage, use, or other consumption of the product in California, and a retailer engaged in business in California must collect it from the purchaser. A purchaser that uses a multiple points of use allocation may not claim the §6406 credit for tax paid to other states.
Purchasers Above $5 Million
SB 122 includes a relief rule for large transactions, implemented in draft Reg. §1600.1. If a single retailer’s sales of electronically transferred or remotely accessed digital products to a single purchaser exceed $5 million in 2027, or, beginning in 2028, in the current or prior year, the retailer is relieved of the obligation to collect tax beginning with the transaction that crosses the threshold. The purchaser must instead obtain a use tax direct payment permit under Rev. & Tax. Code §7051.3 and Reg. §1699.6 and provide the retailer with an exemption certificate. Alternatively, the purchaser may request a waiver from CDTFA before the purchase; if the waiver is granted, the retailer remains liable for the tax, sourced to the places of first use the purchaser identifies. The relief does not apply where the purchaser is an insurer. The threshold remains $5 million through 2031, after which CDTFA adjusts it every five years for inflation.
The threshold is measured for each retailer and purchaser pair, not by a purchaser’s total software spending. Unless a waiver is granted, a large enterprise will be required to self-assess use tax on vendor relationships above the threshold while continuing to pay tax to other vendors.
Registration and Collection Obligations
CDTFA’s Special Notice L-1036 advises that California sellers of digital products need a seller’s permit. Out-of-state sellers engaged in business in California must register for a Certificate of Registration–Use Tax and collect use tax. CDTFA’s tax guide adds that marketplace facilitators of digital products may need to register. A retailer is engaged in business in California under Rev. & Tax. Code §6203(c)(4) if its sales of tangible personal property for delivery in the state, together with those of related persons, exceeded $500,000 in the current or preceding year. Because digital products are now tangible personal property, software vendors with no physical presence in California may meet that threshold. CDTFA has not yet addressed how the “for delivery” standard applies to remotely accessed software or whether 2026 sales count toward the 2027 threshold.
Purchasers must self-assess use tax when a seller is not registered or does not collect the tax, when the $5 million rule shifts the obligation to the purchaser, and when a purchaser that provided an exemption certificate later uses the product in California.
Quick answers
No. Under CDTFA’s draft regulations, a subscription is a continuing sale, and tax applies to subscription periods on or after January 1, 2027, regardless of when the contract was signed or invoiced.
The statewide rate of 7.25 percent plus any district tax at the customer’s location. A sale not delivered on tangible storage media is sourced to the purchaser’s California address in the seller’s records, starting with the billing address.
The retailer stops collecting tax beginning with the transaction that crosses the threshold, and the purchaser pays use tax directly under a direct payment permit, unless CDTFA grants a waiver before the purchase.
RSK Insight
Businesses have less than three months to prepare. Software vendors should determine whether they are engaged in business in California, map their products to the taxable and excluded categories, review how maintenance, implementation, and professional service charges are bundled and invoiced, and confirm that billing systems can apply the address-based sourcing rules and district rates by January 1, 2027. Vendors whose offerings sit near the line between SaaS and platform services should document the basis for their classification.
Businesses that buy software should inventory their subscriptions and licenses, identify vendors that are unlikely to collect California tax, and include the cost of the tax in 2027 budgets. Businesses with employees in several states should evaluate a multiple points of use allocation, and large purchasers should assess whether any vendor relationship will exceed the $5 million threshold and require a direct payment permit. Contract terms that allocate responsibility for sales and use tax should be reviewed before renewals.
The regulations remain in draft, and several questions, including the treatment of optional maintenance and the application of the economic nexus threshold, are unresolved. Colorado will also tax electronically delivered software beginning January 1, 2027 under HB 26-1223, with a limited exemption for custom and negotiated-license software; whether SaaS is taxable there will likely depend on Colorado Department of Revenue rulemaking. Software vendors and multistate purchasers should review both states together.
How RSK Can Help
- Taxability review. Classify software, SaaS, platform, and service offerings under SB 122 and the draft regulations.
- Nexus and registration. Evaluate whether out-of-state vendors are engaged in business in California and assist with registration.
- Contract and invoice review. Review bundled charges, maintenance terms, and tax allocation provisions in customer and vendor agreements.
- Purchaser use tax compliance. Identify untaxed software purchases, develop multiple points of use allocations, and evaluate direct payment permit eligibility.
- Budgeting and multistate planning. Quantify the 2027 cost of the tax and coordinate California and Colorado changes.
Please visit RSK’s Tax Advisory page or contact us for more information on how RSK can help.
References
- SB 122 (Stats. 2026, ch. 23), bill history and text. leginfo.legislature.ca.gov
- CDTFA, Discussion Paper and Draft Emergency Regulations on Digital Products (Sept. 1, 2026). cdtfa.ca.gov
- CDTFA, Special Notice L-1036, sales and use tax on digital products (Sept. 2026). cdtfa.ca.gov
- CDTFA, Tax Guide for Retailers and Purchasers of Digital Products. cdtfa.ca.gov
- Rev. & Tax. Code §6203, retailers engaged in business in California. cdtfa.ca.gov
- Holland & Knight, “Coming Attractions: California Previews Rules on SaaS and Digital Products Tax” (Sept. 21, 2026). hklaw.com
- K&L Gates, “California Expands Sales and Use Tax to SaaS and Certain Digital Products Starting 1 January 2027” (Oct. 8, 2026). klgates.com
- Snell & Wilmer, “CDTFA Proposes Emergency Regulations to Implement California’s New Sales and Use Tax on Digital Products” (Sept. 15, 2026). swlaw.com
- Sales Tax Institute, “Colorado Ends Downloaded Software Tax Exemption Under HB 26-1223” (June 11, 2026). salestaxinstitute.com
This article is for general informational purposes only and does not constitute tax or legal advice. It reflects the statute and CDTFA’s draft regulations as of October 12, 2026. The regulations have not been adopted and may change before or after January 1, 2027. The application of these rules depends on each taxpayer’s specific facts. Readers should consult a qualified advisor before taking action.