By: DiAndria Green | 07/10/26
California has historically drawn a practical line between software sold on physical media and software delivered electronically or accessed remotely. That line will change. SB 122, signed by Governor Gavin Newsom on June 29, 2026, expands California’s definition of tangible personal property to include a “digital product,” including prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely. The law becomes operative for these provisions on January 1, 2027.
In plain terms, California SB 122 moves the focus away from delivery method. The question will no longer be whether the customer receives a disk, download, or cloud login. The more important question will be whether the seller is providing prewritten software held for general or repeated sale. The statute defines prewritten computer software broadly, including software that was initially developed for internal use or on a custom basis if it is later held for repeated sale.
That matters for Software as a Service businesses that provide access to a hosted platform through a browser, app, password, code, or program interface. The bill defines remote access as paid access to prewritten software residing on the vendor’s server or a third-party server.
The bill is not a blanket tax on every digital item. It excludes digital assets, digital audio works, digital audiovisual works, digital books, digital infrastructure, digital video game products, and digital visual works. Custom computer software remains outside taxable sales and purchases, although modifications to prewritten software count as custom only to the extent of the modification.
Yes, for many sellers, SaaS will become taxable in California starting January 1, 2027, if the product is prewritten software accessed remotely and the seller has a California collection obligation. That is the practical answer to is SaaS taxable in California, although every product still needs to be reviewed for classification, bundling, exemptions, and customer use.
This change matters because California has been one of the largest markets where many software companies did not collect sales tax on electronically delivered or remotely accessed software. The administration estimated the proposal would raise $450 million for the General Fund and $560 million in local revenue in the half-year 2026-27 period, with full-year estimates of $900 million and $1.1 billion, respectively.
A software seller generally needs two things before it must collect California tax: an in-scope taxable product and nexus with California. Physical nexus can arise from offices, employees, property, inventory, or other in-state business activity. Economic nexus can apply even when the seller has no California location.
California’s remote seller rules require retailers exceeding $500,000 in sales into California in the current or preceding calendar year to register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax. Once SB 122 treats covered digital products as tangible personal property, software sellers should remeasure their California footprint with those sales in mind.
This is where California SaaS sales tax planning can surprise companies. A seller with no California office may still exceed the economic nexus threshold based on sales volume alone. Conversely, a seller below the threshold and without physical nexus may not have a California collection obligation, even if its product would otherwise be taxable if sold by an in-scope retailer.
Sellers should also consider prior-period exposure in other states. A company that discovers it should have registered elsewhere may need to evaluate whether a Voluntary Disclosure Agreement is available before registration.
For remote digital product sales, SB 122 uses the purchaser’s known California address in the seller’s records, maintained in good faith in the ordinary course of business. If the purchaser provides more than one address, the law generally applies the following hierarchy to determine the correct address:
That hierarchy makes address data more important than it may look at first glance. A headquarters address, billing contact, user location, and payment address could point to different places. Sellers need a consistent, documented method.
This is not simply a Destination-Based Sales Tax issue in the familiar retail sense. Digital products do not ship to a doorstep, and enterprise users may access the same license from multiple offices. SB 122 separately defines the place of use as the place where rights or powers are exercised over the digital product, and for remote access, the place where the person accessing the product is located. It also creates a 90-day presumption that a digital product purchased outside California and used in California was purchased for use in California.
California’s statewide sales and use tax base rate is currently 7.25%, and most local jurisdictions have added district taxes. As a result, software companies cannot simply add one statewide rate to every California invoice. The correct combined rate may vary by customer location.
SB 122 also matters for buyers. If a seller does not collect California tax and the product is purchased for use in California, the purchaser may have a use tax obligation. Remote teams, shared licenses, and multistate users can complicate that review.
One of the more unusual provisions is the $5 million buyer self-remittance rule. When sales of electronically transferred or remotely accessed digital products from a retailer to a purchaser exceed $5 million in the aggregate in the current calendar year, and beginning in 2028 in the current or preceding calendar year, the purchaser becomes responsible for reporting and paying the use tax directly to the CDTFA. The purchaser must also obtain a use tax direct payment permit.
The law also provides an exemption for digital products purchased solely for use outside California or in interstate or foreign commerce, but the seller generally bears the burden unless it obtains a certificate in the form and manner prescribed by the department. If a purchaser certifies out-of-state use and later uses the product in California, the purchaser becomes liable for tax.
For buyers, the practical question is whether purchasing, tax, IT, and finance teams are speaking to each other. Software procurement often happens department by department. Tax liability, unfortunately, prefers to arrive consolidated and wearing sensible shoes.
The worst time to build a tax process is after the first taxable invoice has already gone out. Software companies should treat 2026 as the preparation window and begin with product classification. Identify prewritten software, custom software, digital infrastructure, professional services, and bundled transactions.
Next, review California Nexus. Calculate current and prior-year California sales, including sales that may become taxable under SB 122. Companies near or above the $500,000 threshold should assess registration timing, filing responsibilities, marketplace relationships, and customer communication. Sellers should also consider whether their multistate review needs to include related issues such as SaaS Taxation in Louisiana, since one state law change often reveals exposure in another state.
Billing systems need attention early. Customer records should capture the address fields required for California sourcing, and the tax engine or billing platform should calculate state, local, and district taxes by location. Test renewals, upgrades, mid-cycle changes, credits, and multi-entity customer accounts.
Exemption certificates should be cleaned up before the deadline. Resellers, exempt entities, and customers buying solely for out-of-state use may require specific documentation.
Contracts also need review. Annual or multi-year agreements that span January 1, 2027 may raise questions about tax pass-through clauses, pricing, notice requirements, gross-up language, and who bears newly imposed tax. Large enterprise contracts should also be reviewed for the $5 million self-remittance rule and direct payment permit implications.
Bennett Thrasher can assist by helping companies assess product taxability, determine nexus, review sourcing and billing processes, evaluate exemption documentation, plan customer communications, and coordinate sales and use tax compliance across California and other states. The goal is not simply to register. The goal is to build a defensible process before the new rules become a live billing issue.
Generally, California has not taxed electronically delivered or remotely accessed SaaS under current law when no tangible software transfer occurs. That changes January 1, 2027 for prewritten software accessed remotely by California customers, assuming the seller has nexus and no exemption applies. Custom software and excluded digital products still require separate analysis under the new rules and guidance.
SB 122 is California budget legislation that expands tangible personal property to include certain digital products, especially prewritten computer software delivered on physical media, electronically, or through remote access. Governor Newsom approved it June 29, 2026, and the digital product sales and use tax provisions become operative January 1, 2027. CDTFA guidance may add detail.
SB 122 excludes several categories from the definition of taxable digital product, including digital assets, digital audio works, digital audiovisual works, digital books, digital infrastructure, digital video game products, and digital visual works. Custom computer software also remains exempt, although separately stated modifications to prewritten software are custom only to the extent of the modification.
Out-of-state software companies may need to register if they sell taxable prewritten software or SaaS into California and have Nexus. Economic nexus generally applies when California sales exceed $500,000 in the current or prior calendar year. Physical presence can also create an obligation. Companies below the threshold should still document their analysis and monitor sales.
SaaS companies should confirm product taxability, capture the customer address fields needed for California sourcing, configure state and local tax rates, test renewal and upgrade invoices, and collect exemption certificates before January 1, 2027. Billing, sales, finance, tax, and customer success should align on customer notices so the new tax line does not surprise buyers.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact DiAndria Green, Partner and Co-Leader of Bennett Thrasher’s State and Local Tax (SALT) practice, or call us at 770.396.2200.
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