California SaaS Sales Tax 2027: What SB 122 Taxes from January 1

In short: Yes. From January 1, 2027, California sales and use tax applies to SaaS and other prewritten software, whether it is downloaded or accessed remotely. Senate Bill 122 adds "digital products" to the definition of tangible personal property. Music, movies, eBooks, video games and cloud infrastructure stay outside the tax.

Updated October 2026. This guide reflects CDTFA Special Notice L-1036 (September 2026) and CDTFA's proposed emergency regulations. Those regulations were still proposals when this guide was written.

Is SaaS taxable in California from 2027?

Yes. Starting January 1, 2027, the sale of a "digital product" is taxable in California, and SaaS counts as a digital product.

Senate Bill 122 (Stats. 2026, ch. 23) was signed on June 29, 2026 (SB 122 bill page). It expands the Sales and Use Tax Law's definition of tangible personal property to include digital products and associated copyright or patent interests (CDTFA Special Notice L-1036).

Until the end of 2026, California does not generally tax SaaS. That is why many state-by-state SaaS lists still show California as non-taxable. Those lists will be out of date on January 1, 2027.

What counts as a digital product under SB 122?

A digital product is prewritten computer software. It is covered however it reaches the customer: on a disk or other storage media, by download, or through remote access.

CDTFA defines prewritten software as software held or existing for general or repeated sale or lease. Software first built as custom or in-house software can become prewritten once it is offered for repeated sale. Combinations of two or more prewritten programs also count (L-1036).

The law has an exemption for digital products that represent a service. That exemption expressly does not cover SaaS. So a subscription to prewritten software that customers use online is taxable.

Which digital items are not taxed?

Seven categories are not digital products, and four exemptions apply. The table below summarizes CDTFA's notice.

The line between SaaS and "digital infrastructure" will matter for many cloud providers. If your product mixes hosted software with infrastructure, review how each part is billed.

Who has to register and collect the tax?

California sellers of digital products need a seller's permit. Out-of-state sellers that are "engaged in business" in California need a Certificate of Registration – Use Tax. Both must collect, report and pay the tax on taxable sales (L-1036).

For remote sellers, California's economic nexus test is $500,000. A retailer whose sales of tangible personal property for delivery in California meet $500,000 in the preceding or current calendar year must register. Sales by related persons are combined (CDTFA, Wayfair guidance).

Because SB 122 makes digital products tangible personal property, software sellers that ignored this test until now should look at it again. Confirm with CDTFA how your digital product receipts are counted. Our guide to economic nexus by state explains how thresholds work elsewhere.

Registration with CDTFA is free through its online services portal. Foreign companies face the same rules; see US sales tax for European and UK sellers.

Where is a digital product sale sourced?

Generally to the customer's address. For products transferred electronically or accessed remotely, the place of sale is generally the customer's address, and the place of use is where the person accessing the product is located (L-1036).

CDTFA's discussion paper of September 1, 2026 sets out the statutory order. It uses the purchaser's known California address in this order (CDTFA discussion paper):

1. Billing address.
2. Shipping or delivery address.
3. Mailing address linked to the payment instrument.
4. Mailing address.

If no address applies, the sale is treated as outside California. A digital product bought outside California and used in California within 90 days is presumed bought for use in California. Local and district tax rates follow this sourcing, so your billing data needs clean addresses.

What is the $5 million purchaser threshold?

It shifts the tax from the seller to very large buyers. If a retailer's gross receipts from electronically transferred or remotely accessed digital products sold to one purchaser exceed $5 million, the retailer may be relieved of liability for that purchaser (L-1036).

The purchaser then reports the tax directly. It may need a Use Tax Direct Payment Permit. According to CDTFA's discussion paper, 2027 sales use the calendar year. From January 1, 2028, the current or preceding calendar year can be used. Insurers are excluded, and the amount is to be adjusted for inflation by October 1, 2031 (CDTFA discussion paper).

Enterprise SaaS vendors should flag customers near this level. Their invoicing and exemption records will need to show which accounts are over the threshold.

What do CDTFA's proposed emergency regulations cover?

CDTFA proposed new and amended regulations to apply SB 122. They are not final yet. On September 1, 2026, CDTFA published a discussion paper, held an interested parties meeting on September 10 and asked for written comments by September 24, 2026 (CDTFA discussion paper).

• New: Regulation 1502.2 (custom computer software), 1600 (digital products), 1600.1 (tax liability threshold), 1600.2 (multiple points of use) and 1600.3 (use solely outside California).
• Amended: Regulation 1502 (data processing), 1507 (technology transfer agreements) and 1699.6 (use tax direct payment permits).

Proposed Regulation 1600.2 adds a multiple points of use (MPU) certificate. A seller that timely obtains a valid certificate in good faith is relieved of tax on the out-of-state portion. The proposed operative date is January 1, 2027. Check the final text before you rely on it.

How should software sellers prepare before January 1, 2027?

Start with your product catalog and your customer data. Most of the work is classification and addresses.

1. Map every product to the categories above: SaaS, downloaded software, custom software, infrastructure or excluded content.
2. Check registration. Get a seller's permit or a Certificate of Registration – Use Tax if you need one.
3. Clean customer addresses in your billing system so sourcing and district rates work.
4. Update tax settings in your billing platform and invoices for California customers from January 1, 2027.
5. Collect documents for exemptions, such as use solely outside California or MPU certificates once final.
6. Flag $5 million customers who may need a Use Tax Direct Payment Permit.
7. Read CDTFA's guide for retailers and purchasers of digital products and watch for the final regulations.

For how other states treat software, see is SaaS taxable? A state guide. To file across many states, read how to automate US sales tax filing in every state.

Sources

• CDTFA Special Notice L-1036: Sales and Use Tax Applies to Digital Products Beginning January 1, 2027 (September 2026)
• CDTFA: Tax Guide for Retailers and Purchasers of Digital Products
• CDTFA: Discussion paper and proposed emergency regulations on digital products (September 1, 2026)
• California Legislative Information: SB 122
• CDTFA: Use tax collection requirements for remote sellers (Wayfair)

How Taxually handles this

Taxually's LumaTax runs a nexus analysis on your sales, helps you register in states such as California, and prepares and files multi-state sales tax returns. LumaTax is currently available to enterprises and service providers such as accounting firms; e-commerce sellers can join the waiting list.

Related guides

• Is SaaS Taxable? A Sales Tax Guide for Businesses
• Economic Nexus by State: What You Need to Know
• How to Automate US Sales Tax Filing in Every State