California Sales Tax on SaaS and Digital Products 2027: New Rules for Software Providers

Part of California’s Budget Framework 2026 is Senate Bill 122(Bill). The California Committee Bill presented SB 122 as a legislative instrument by which, after its adoption, the rules for taxing the State’s digital economy will be aligned with the emerging global practices of extensive taxing of digital products and services. 

The State’s Governor assented to the Bill on June 29, 2026. With the adoption of the Bill, the California Revenue and Taxation Code is amended to include the sales and use tax liability on a wide array of digital products and services. 

The imposition of the sales and use tax on a wide scope of digital products and services in California represents a significant taxability shift in the State seen from the perspective of tax revenue to the State’s budget. Taking into consideration that California customers spend significant funds for the purchases of the software from both local suppliers, as well as from out-of-state suppliers, the State Treasury could receive an injection of tax revenue in an approximate value of EUR 5 billion on a yearly basis, with great growth potential. 

California Sales Tax on Digital Products 

Providers of software have long benefited from tax-exempt status for supplies of software to California-based companies or consumers. With the adoption of SB 122, this radically changed. From January 1, 2027, providers of digital products and services are going to be liable to charge, collect, and remit sales tax to the State’s Department of Revenue. 

First, they will need to register once they reach the threshold. Two types of thresholds could trigger the obligation to register for sales tax; the thresholds apply to both local and out-of-state vendors: 

• Economic threshold(nexus): More than USD 500,000 generated in the current or preceding calendar year, calculated on a gross basis 
• Physical nexus: Local employees, offices, storing goods in a California warehouse(even through a third-party logistics center, such as FBA), having a warehouse

The sales tax rate applicable to sales of digital products is a result of a local state rate currently fixed at 7.25% and a local sales tax rate that varies by the buyer’s location. 

Tax Base on Digital Products 

The SB 112 significantly modifies the definition of “tangible personal property”(TPP) to include digital products(addressing specifically the prewritten computer software), regardless of how they are delivered. California’s sales tax applicability to prewritten computer software is limited to the manner in which it is delivered, primarily focusing on the “tangibility” of the solution, the one that can be “seen” or “touched”.

The SBB 112 abolishes this limitation, expanding the tax base of the prewritten software no matter whether it is delivered on a tangible basis, downloaded, accessed online on demand, or accessed remotely on a subscription basis. 

The adopted Bill clearly makes the emphasis that under the newly adopted tax framework, when it comes to a digital product, any transfer of rights to “access, use, download, or manipulate” to use it will trigger taxability. 

Scope of Digital Products 

The expansion of the tax base concerning prewritten computer software under SB 122 shall capture almost all software delivery methods. With more specifics, let’s look at the list below. 

Taxable Digital Products 

Prewritten computer software, regardless of how they are delivered.

• SaaS 
• Remotely accessible software 
• Subscription-based apps 
• Hosted Apps 
• Other 

However, SB 122 hasn’t labelled all software sales as taxable; there are still some types of digital products that are tax-exempt. Some of those could be seen below. 

Tax-Exempted Digital Products/Services 

• Custom software 
• E-books 
• Digital audio, video, audiovisual works 
• Video games 
• Professional service such as consulting 
• Data processing services 

Place of Supply Rules 

The SB 122 introduces in detail the sourcing rules, which are of essential importance in determining where the digital sale should be taxed. The bill follows the destination-based principle. The digital sale is tied to the buyer’s address in California, and the Bill establishes the clear determining factors for this. 

The determination of the buyer’s known address shall be defined following the hierarchical order, as shared below: 

• Billing address
• Shipping or delivery address
• Address associated with the payment instrument
• Any other known mailing address

The providers of digital products sold online or through remote access should align their taxability logic in accordance with this hierarchy to be able to determine with rooftop accuracy the buyer’s address, and to be able to apply the correct tax rate to the transaction. 

Place of Use 

To enhance the application of the use tax for the supplies of digital products, the Bill introduces the concept of “place of use”. The place of use is the location where the buyer actually uses or accesses the software. For remote access, this is the location where the user is located at the actual moment when they’re using the product. 

The determination of the place of use could be quite tricky when, via one subscription/license to use a product, there are multiple users who could access the software remotely from different jurisdictions. 

B2B Threshold 

The Senate Bill 122 introduces a USD 5 million self-remittance threshold. If the single purchaser makes a payment for usage of the software from one supplier in a value above the threshold on an annual basis, the supplier isn’t obliged to charge the sales tax, and the buyer becomes accountable for the tax. 

To be able to execute this transaction in a compliant manner, there are necessary requirements, such as documentation that clearly shows the existence of a tax-exemption certificate or resale certificate. There is also a necessity for documentation that supports the existence of the threshold.

Takeaway 

Frequently Asked Questions