By Tae Seo

New rules take effect January 1, 2027—and will affect both software providers and business purchasers.

Published: July 15, 2026

AT A GLANCE
     – California enacted Senate Bill 122 on June 29, 2026.
     – Beginning January 1, 2027, prewritten software will generally be taxable whether delivered on physical media, downloaded, or accessed remotely—including many SaaS subscriptions.
     – Vendors and purchasers should revisit product classifications, customer-location data, exemption documentation, and use-tax procedures before the new rules take effect.

For years, the way software was delivered often determined the California sales-tax result. A program transferred on physical media could be taxable, while the same program delivered by download or remote login generally was not. Senate Bill 122 (Chapter 23, Statutes of 2026) largely removes that distinction for prewritten software beginning January 1, 2027.

Under the new law, covered digital products are treated as tangible personal property whether they are delivered on a disk, downloaded, or accessed on a vendor’s server. That change brings many software-as-a-service (SaaS) subscriptions into the taxable base and creates new responsibilities for software vendors, remote sellers, and business purchasers.

What changes on January 1, 2027?

California’s existing treatment generally distinguishes prewritten software delivered on tangible media from software delivered electronically or accessed remotely. SB 122 largely eliminates that delivery-method distinction for prewritten software.

Custom software continues to be excluded from the statutory definitions of “sale” and “purchase,” but the exception is limited to software prepared to the special order of a single customer.

What will generally be taxable?

SB 122 does not tax every item delivered digitally. Its focus is prewritten computer software—software held or existing for general or repeated sale or lease—even if the program was originally developed for a particular customer or for internal use.

• – Downloads and electronic licenses. A purchaser’s right to download, copy, update, store, manipulate, or otherwise use prewritten software falls within the new definition.
• – Remote-access software and SaaS. Paid access to prewritten software residing on a vendor’s or third party’s server—usually through a password, browser, or program interface—will generally be taxable.
• – Subscriptions and term licenses. The statute covers both permanent and temporary rights to use a digital product. Calling the charge a subscription rather than a license does not change the result.

What stays outside the new rules?

SB 122 draws several important boundaries. Some are stated clearly in the law; others will depend on what the customer is actually buying, how the platform works, and how the contract and invoice describe the charges.

• – Custom computer software. Software prepared to the special order of a single customer remains outside the definitions of “sale” and “purchase.” A modification to existing prewritten software qualifies only to the extent of the customer-specific work, and the related charge must be separately stated to fit the statutory definition.
• – Specified digital content. The statutory definition excludes digital assets, digital audio works, digital audiovisual works, digital books, digital video games, and digital visual works.
• – Digital infrastructure. The law excludes certain cloud-based infrastructure that allows users to create, deploy, scale, or run their own software without managing the underlying infrastructure. The exclusion resembles some IaaS- and PaaS-style offerings, but it is not a blanket exclusion for every cloud service.
• – Qualifying human-effort services. A digital product representing an electronically delivered service may be exempt when it primarily involves human effort that begins after the customer requests the service. The statute expressly states that this exemption does not apply to the customer’s right to use or access the provider’s software through a browser or program interface.
• – Reproduction rights for resale distribution. The right to reproduce or copy a digital product for distribution to third parties for consideration is exempt, subject to the statutory requirements.
• – Certain out-of-state use. Electronically transferred or remotely accessed digital products purchased solely for use outside California or in interstate or foreign commerce may qualify for exemption. Sellers will generally need a properly completed exemption certificate, taken in good faith, to shift the burden of proof. This exemption does not apply to products transferred on tangible storage media.

New sourcing rules for digital products

For a non-in-person sale of electronically transferred or remotely accessed software, the place of sale or purchase is generally the purchaser’s known California address in the seller’s records, maintained in good faith. If the purchaser provides multiple addresses during the transaction, the statute applies the following priority:

1. 1. Billing address
2. 2. Shipping or delivery address
3. 3. Mailing address associated with the payment instrument
4. 4. Purchaser’s mailing address

If the purchaser provides no address during the transaction, the seller generally follows the same hierarchy using the most recent address already in its records. If none of the statutory address rules applies, the transaction is deemed to occur outside California. However, a seller relying on that result is relieved from liability only if it can show that it made a reasonable effort to obtain accurate and complete address information. Separate rules apply to in-person sales and products delivered on tangible storage media.

For use-tax purposes, remote access occurs where the person using the software is located. The law also creates a rebuttable presumption that a digital product purchased outside California and used in California within 90 days was purchased for use in California.

Multistate users and enterprise licenses

Enterprise licenses may be available to employees in several states even though the invoice lists only a headquarters address. SB 122 allows CDTFA to approve or require alternative methods that fairly reflect California use, including for licenses available in multiple locations. As of the date of this alert, CDTFA has not prescribed a universal allocation method. A headquarters address or informal user-count allocation should not be assumed to control without supporting guidance and records.

Large purchases: responsibility may shift to the purchaser

SB 122 includes a special rule when a retailer’s aggregate sales of electronically transferred or remotely accessed digital products to a single purchaser exceed $5 million during the current calendar year. Beginning in 2028, the test looks to the current or preceding calendar year.

Subject to the statute’s exceptions, responsibility generally shifts on the transaction that causes the threshold to be exceeded. The purchaser must self-assess and remit the applicable state, local, and district use tax directly to CDTFA for that transaction and covered transactions while the threshold rule applies.

The purchaser must obtain a use tax direct payment permit and provide the required certificate to the seller. The statute allows a limited CDTFA waiver process under which the retailer may continue to collect.

Economic nexus: an important point still awaiting guidance

California’s existing economic-nexus rule generally requires a remote retailer to register and collect use tax when the retailer and its related persons have more than $500,000 of combined sales of tangible personal property for delivery into California during the current or preceding calendar year. SB 122 does not create a separate nexus threshold for SaaS. Instead, it classifies covered digital products as tangible personal property beginning January 1, 2027.

The reasonable statutory reading is that covered digital-product sales made on or after the effective date will count toward the existing $500,000 threshold. That conclusion is a legal inference from the new tangible-personal-property classification; CDTFA has not yet issued an express instruction confirming the transition. SB 122 also does not state whether 2026 SaaS receipts must be included in the preceding-year calculation for 2027. Remote sellers should model their 2027 exposure and watch for guidance before relying on either treatment of the 2026 lookback period.

Key implementation questions remain

CDTFA has scheduled a public workshop for July 21, 2026 and has asked stakeholders which parts of the law need clarification through emergency or regular rulemaking. The workshop notice does not yet resolve the practical questions below. Based on the enacted language, businesses should watch for guidance on:

• – bundled charges that combine taxable software with implementation, consulting, training, support, data, or other services;
• – allocation methods for multistate and concurrent users;
• – forms and substantiation for out-of-state-use and direct-payment certificates;
• – the boundary between taxable SaaS and excluded digital infrastructure or qualifying human-effort services;
• – renewals, prepayments, credits, refunds, and other transactions spanning the January 1, 2027 operative date; and
• – application of existing exemptions and partial exemptions to newly taxable digital products.

What businesses should do now

Software vendors and SaaS providers

• – Create a product taxability matrix that separates prewritten software, custom development, modifications, infrastructure offerings, digital content, and human-effort services.
• – Review contracts and invoices so taxable and potentially exempt components are separately described and priced where appropriate.
• – Confirm that customer master data captures reliable billing and other required address information, and that tax engines can apply state, local, and district rates.
• – Reassess California registration and economic-nexus exposure using post-effective-date digital-product receipts, and separately track the unresolved 2026 lookback issue.
• – Identify customers approaching the $5 million threshold and design a process for direct-payment permits and certificates.

Business purchasers

• – Inventory software and cloud contracts, including purchases made by decentralized departments and charged through expense systems or corporate cards.
• – Map where employees and other authorized users access each product and preserve support for any out-of-state-use position.
• – Evaluate accounts-payable and use-tax accrual processes for vendors that do not collect California tax.
• – Review high-value vendor relationships for the $5 million purchaser self-assessment rule.
• – Budget for the cost impact on renewals and new contracts beginning in 2027, and revisit tax clauses before signing multi-year agreements.

The bottom line

The headline change is straightforward: beginning January 1, 2027, many downloads and remotely accessed software products will be taxed in the same manner as software delivered on physical media. The harder work is determining what each contract actually provides, where the product is used, who must report the tax, and which documents support an exclusion or exemption.

That review should begin before year-end. Our state and local tax professionals can help businesses evaluate product classifications, nexus, sourcing, contracts, exemption documentation, and billing or use-tax system readiness before the new rules take effect.

Sources and Authority

• – California Legislative Information—SB 122, chaptered bill text
• – California Legislative Information—SB 122 status and enactment history
• – CDTFA—Digital Products Workshop Notice and Agenda (July 7, 2026)
• – CDTFA—Use Tax Collection Requirements Based on Sales into California
• – California Legislative Analyst’s Office—Sales Tax on Prewritten Software

This publication is for general informational purposes only and does not constitute legal or tax advice. The application of SB 122 depends on the facts and circumstances of each transaction. Guidance may change as CDTFA develops regulations and administrative procedures.