By Ventura Pranas | 11/11/2026
California has enacted Senate Bill 122 (SB 122, Stats. 2026, Ch. 23), which expands California’s sales and use tax treatment to certain digital products beginning January 1, 2027. The change is particularly relevant to businesses that sell or purchase SaaS, cloud-based software, or other qualifying prewritten software for use in California.
Under the new rules, qualifying digital products—including certain prewritten software delivered electronically or accessed remotely—will generally be brought within California’s sales and use tax framework.
However, not every digital product, technology service, or cloud service will automatically become taxable. The tax treatment depends on the nature of the product, how it is delivered or accessed, the customer’s location, applicable exclusions and exemptions, and the seller’s California registration and collection obligations.
Note on implementation status: The California Department of Tax and Fee Administration (CDTFA) held a public workshop on July 21, 2026, and has proposed emergency regulations to implement SB 122. These regulations are not yet final. Certain definitions, bundling rules, and documentation requirements may be refined before January 1, 2027, operative date, so businesses should treat current interpretations as subject to further guidance.
SB 122 expands California’s definition of taxable tangible personal property to include qualifying digital products, whether they are:
As a result, many SaaS and software subscription transactions may become subject to California sales and use tax beginning January 1, 2027.
However, the legislation does not make every technology or digital service automatically taxable. The treatment may vary for custom software, professional services, human-effort-based services, digital infrastructure and other specifically excluded or differently treated transactions.
SaaS and software sellers
Businesses selling SaaS, cloud platforms, subscription software or other digital products to California customers should assess whether they may have new sales tax collection and reporting obligations. Key areas requiring review include:
Businesses purchasing SaaS and software
The impact is not limited to software companies. Businesses purchasing software for California operations should also review their SaaS and digital product spend, particularly where vendors may not collect California tax. Areas to consider include:
Although the new rules become effective on January 1, 2027, businesses should use the remaining months of 2026 to understand their exposure and prepare their systems. Waiting until 2027 may create challenges involving:
A proactive review provides an opportunity to address these matters before the new rules take effect.
Effective Date: January 1, 2027
Main Impact: Certain digital products, including qualifying SaaS and prewritten software, become subject to California sales/use tax
Who May Be Affected: Software/SaaS sellers, and businesses that purchase qualifying digital products
Applicable Tax Rate: Applicable California state, local and district rate based on the applicable place-of-sale rules
Key Threshold: Special $5 million rule that may shift the reporting obligation from the retailer to the purchaser
Action Required: Review product taxability, nexus, customer/vendor data, contracts, and billing systems during 2026
A: Qualifying prewritten computer software can fall within the new digital-product rules whether it is transferred on physical media, electronically, or accessed remotely. This includes qualifying SaaS arrangements where customers receive the right to access and use the provider’s prewritten software. The classification should be based on the substance of the product and transaction rather than simply the way the product is marketed or described.
A: SB 122 specifically excludes several categories, including:
Qualifying custom computer software is also treated differently from prewritten software.
The distinction between SaaS, custom software, professional services and cloud infrastructure can therefore be important. Businesses with products containing multiple components should consider a product-by-product review.
A: No. The new rules apply to qualifying digital products. The specific product, transaction structure, delivery method, applicable exclusions or exemptions, and other facts must be considered. Accordingly, businesses should not assume that every SaaS transaction is taxable—or that every SaaS transaction remains non-taxable.
A: The applicable rate depends on California’s sourcing rules, which generally look to how the product is delivered:
If a California address cannot be identified for a remote or electronic transaction, the sale may be treated as occurring outside the state. Accordingly, businesses should not apply a single blanket tax rate to all California SaaS transactions.
A: SB 122 includes a special rule for certain qualifying digital products that are transferred electronically or accessed remotely.
For calendar year 2027, when aggregate gross receipts from qualifying digital-product sales by a retailer to the same purchaser exceed $5 million, the retailer may be relieved of its obligation to collect or pay tax on the transaction that causes the threshold to be exceeded, subject to the statutory requirements. The purchaser then becomes responsible for reporting and paying the applicable use tax directly to the California Department of Tax and Fee Administration (CDTFA).
Beginning in 2028, the threshold generally looks to the current or preceding calendar year. Purchasers subject to the direct-reporting requirement generally need to obtain a Use Tax Direct Payment Permit and provide the required documentation to the retailer. This is not a blanket exemption from tax. Businesses approaching this threshold should review the specific requirements before relying on the provision.
A: Potentially, yes.
An out-of-state business may have California sales-tax registration and collection obligations if it is considered engaged in business in California under the applicable nexus rules. As a general reference point, California’s existing economic nexus threshold requires remote sellers exceeding $500,000 in sales into California (in the current or preceding calendar year) to register with the CDTFA and collect California tax — and SB 122 brings sales of taxable digital products and SaaS into that same calculation.
Accordingly, a business should not determine its California sales-tax obligation solely by looking at its state or country of incorporation.
Businesses should review their California sales, activities and other nexus factors to determine whether registration and collection requirements apply.
A: An overseas business, including an India-based software company, may have California sales-tax obligations if it has the required California nexus and makes taxable sales for use in California. The fact that the seller is located outside the United States does not, by itself, eliminate potential California sales-tax obligations.
Separate U.S. federal, state and international income-tax considerations may also apply to an overseas business. Those issues should be evaluated separately based on the entity structure and facts.
A: The absence of sales tax on a vendor invoice does not necessarily mean that no California tax is due. Depending on the circumstances, the purchaser may have a use-tax obligation and may need to report and pay the tax directly. Businesses should therefore review their accounts payable and software/vendor spend as part of their 2026 readiness process.
A: We recommend completing a California SB 122 Readiness Review during 2026.
The review should cover:
1. Product Taxability: Identify software, SaaS and other digital products and determine whether they fall within the new rules.
2. California Nexus: Evaluate whether your business has a California registration and collection obligation.
3. Customer Information: Review California customer addresses and the information needed to apply the appropriate sourcing rules.
4. Contracts and Pricing: Review customer agreements, pricing and tax clauses for transactions beginning January 1, 2027.
5. Billing and Accounting Systems: Confirm that billing, ERP and accounting systems can appropriately identify taxable transactions and account for sales tax.
6. Purchases and Use Tax: Review SaaS and software purchases to identify situations where California use tax may need to be accrued or reported.
7. Large Customer Transactions: Identify customers whose purchases from the same retailer may approach the $5 million threshold.
Assume a company sells a qualifying prewritten SaaS subscription for $100,000 to a California business.
Beginning January 1, 2027, the company should determine:
Is the product a taxable digital product?
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Does the seller have California nexus and a collection obligation?
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Where is the sale sourced?
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What California state, local and district tax rate applies?
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Does an exemption or other special rule apply?
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How should the tax be invoiced, collected and reported?
The answer cannot be determined simply by applying a blanket “10% SaaS tax.” The applicable tax depends on the transaction and California’s applicable sourcing rules.
Likewise, if a California business purchases qualifying SaaS from an out-of-state provider that does not collect California tax, the purchaser may need to consider its own use-tax obligations.
This example is illustrative only and does not determine the tax treatment of any particular transaction.
Our California SB 122 Impact & Readiness Review can help businesses identify and address potential exposure before the effective date. Our team can assist with:
Already Working with Us for Bookkeeping, Tax or Audit?
If we currently support your organization with bookkeeping, tax or audit services, we may already have access to information that can help identify potential SB 122 exposure. For example, our team can review:
Revenue records → California customer sales → Product taxability
Accounts payable → SaaS/software vendors → Potential use-tax exposure
This allows us to help determine whether additional action may be required before the law becomes effective.
The question is not simply “Is SaaS taxable in California?” The more relevant question for your business is:
“How will California SB 122 affect our specific products, customers, purchases and compliance requirements?”
If your business sells or purchases SaaS or software used in California, 2026 is the time to review your position before the new rules become operative on January 1, 2027.
This publication is intended to provide general information and does not constitute tax, accounting or legal advice. The application of SB 122 depends on the specific facts and circumstances of each business and transaction.
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