California will tax SaaS and prewritten software in 2027

California’s legislature passed SB 122 as part of the 2026-27 budget package, and Governor Newsom signed it on June 29, 2026. ^[1]

The law subjects prewritten software and SaaS to California sales and use tax starting January 1, 2027. Most other digital products, including ebooks, music, streamed video, digital games, and digital assets like NFTs, remain exempt. The change is expected to generate roughly $1.4 billion in additional revenue in fiscal year 2027.

What would change

California currently does not impose sales tax on prewritten software delivered electronically or accessed remotely. SB 122 changes that by amending the definition of tangible personal property to include digital products.

The applicable rate is California’s full state and local sales and use tax: 7.25% at the state level plus applicable district taxes, which can bring combined rates to approximately 10% or higher in some California jurisdictions.

How sales will be sourced

The signed law includes sourcing rules that weren’t settled when the bill was moving.

They vary by how the product is delivered:

• Software on physical media is sourced to where the transfer happens.
• In-person transactions with electronic delivery are sourced to the seller’s place of business.
• Remote and electronic sales, which covers most SaaS, are sourced to the customer’s billing address.

If no California address can be identified for the sale, it may be treated as occurring outside the state. For SaaS sellers, this makes billing address data a compliance input starting January 1. If your billing system doesn’t reliably capture and validate customer addresses, that’s now a gap to close.

Important nuances sellers need to know

The law provides exemptions for purchases made solely for use outside California, for certain reproduction and resale rights, and for digital products representing services that primarily involve human effort. Custom software remains explicitly exempt. How CDTFA will treat bundled software and services, implementation fees, customization, and support services is still not defined in the statute.

The $5 million rule shifts liability from the seller to the buyer: when a purchaser exceeds $5 million in annual digital product purchases from a single retailer, the retailer is relieved of the collection obligation and the purchaser must self-assess and remit use tax directly.

If you have large enterprise customers approaching that threshold, your invoicing and their procurement teams both need to know about this before January.

The law also grants CDTFA two-year emergency regulatory authority, meaning key implementation details, including the precise treatment of bundled transactions, will be developed through rulemaking. Watch for CDTFA guidance in the second half of 2026.

California’s economic nexus threshold

California’s economic nexus threshold for remote sellers is $500,000 in California sales. Now that SaaS is becoming taxable, out-of-state SaaS vendors meeting that threshold must register and collect California sales tax on their California sales starting January 1, 2027.

Who this affects

• SaaS companies selling into California: your California sales become taxable on January 1, 2027. That’s under six months away. Compliance preparation should already be underway.
• Out-of-state SaaS vendors with California sales above $500,000: you need a California seller’s permit and collection in place by January 1 if you don’t have them already.
• Sellers with enterprise customers buying more than $5 million per year: understand the use tax self-assessment shift; your obligation for those accounts works differently from standard collection.
• Businesses that purchase SaaS or software for use in California: vendors will start adding California sales tax to invoices on January 1, 2027. Model the cost impact now, especially on large contracts.
• Companies with bundled offerings combining software and services: the line between taxable prewritten software and nontaxable services isn’t defined yet. This creates classification risk to work through before January.
• Custom software developers: custom software remains exempt. Confirm your product classifications are defensible under CDTFA Regulation 1502 definitions.

Next steps for sellers

1. Classify your California software sales now. Identify which products are prewritten versus custom, and which transactions involve bundled software and service components.
2. Audit your billing address data. Remote sales are sourced to the customer’s billing address, so incomplete or unvalidated address data becomes a tax problem on January 1.
3. If your California SaaS sales exceed $500,000 and you’re not registered as a California seller, start your registration now rather than in December.
4. If individual customers buy more than $5 million per year from you, plan for the use tax self-assessment shift and tell those customers it’s coming.
5. Review California customer contracts for tax pass-through provisions. Contracts that don’t address tax will create pricing disputes in January.
6. Watch for CDTFA guidance on bundled transactions and definitions. The emergency rulemaking authority means the details can move quickly.

If you use TaxCloud: TaxCloud is updating its California tax calculation engine to apply sales tax to prewritten software and SaaS transactions effective January 1, 2027. No action is needed on calculation.