Tax Insight

California to impose sales and use tax on digital products including prewritten software and SaaS beginning January 1, 2027

Insight
5 minute read
July 10, 2026

What happened?

Legislation (SB 122) signed by California Governor Gavin Newsom (D) on June 29, 2026 implements the Governor’s budget revision to apply sales and use tax to transactions involving digital products transferred on tangible media, transferred electronically, or accessed remotely, effective January 1, 2027. Digital products include prewritten computer software, regardless of how the software is delivered or accessed, and software as a service (SaaS). Custom software remains exempt.

Why is it relevant?

The new legislation significantly expands the sales tax base to now tax electronically delivered software and remotely accessed software. Vendors and purchasers of software and SaaS will face new sales tax collection, remittance, and cost considerations. The legislation introduces sourcing hierarchies and, under certain circumstances, shifts the liability for tax remittance from the retailer to the purchaser, particularly for transactions exceeding $5 million in the aggregate.

Actions to consider

Retailers and purchasers of software in California should consider the following steps in anticipation of the January 1, 2027 effective date:

Identify offerings that constitute digital products, including prewritten computer software, SaaS, and other electronically transmitted solutions, and assess how those offerings are currently treated for sales tax purposes.
Evaluate systems and billing processes to determine whether they can distinguish taxable software transactions (across all delivery methods) and apply sales tax appropriately.
Evaluate accrual processes to determine whether they can identify taxable software purchases and self-assess use tax where needed.
Consider whether any exemptions are available for interstate or other use outside California.
Consider whether the digital product, now defined to be tangible personal property, meets the requirements for exemption and/or reduced rate for manufacturing and R&D or electric power generators and distributors.
Consider whether the software is exempt as custom software, which is defined as a computer program prepared to the special order of the customer even though it may incorporate preexisting program components.
Consider the potential impact of the tax on pricing, contract terms, and planning for transactions occurring on or after January 1, 2027.
Monitor subsequent guidance from the California Department of Tax and Fee Administration (CDTFA) that may clarify definitions, sourcing rules, exemptions, resale treatment, bundling rules, documentation requirements, and transition rules. A workshop is scheduled for July 21, 2026.