California’s SB 122 Will Tax SaaS and Prewritten Software Starting Jan 1, 2027

SB 122 amends California tax law so "digital products" — defined to include prewritten computer software transferred on physical media, electronically, or accessed remotely — count as tangible personal property for sales and use tax purposes. The change takes effect January 1, 2027. California joins more than 20 states that tax SaaS in some form.

Vendors: Companies that sell prewritten software or SaaS will now have to collect and remit California sales tax unless a buyer-specific exception applies. Many remote sellers who never previously registered with California tax authorities may cross existing nexus thresholds because software sales now count toward the $500,000 sales threshold or physical presence nexus.

• Prewritten software: products built once and sold repeatedly, including typical B2B SaaS offerings. The law treats software sold to multiple buyers as prewritten even if it began as a custom build for one customer.

• Custom software prepared to the special order of a single purchaser (only the custom portion is exempt, and charges must be separately stated).

• Human effort services delivered electronically where the work originates after the customer's request.
• Digital entertainment like books, music, video, games, and crypto are excluded.

Sourcing, place of use, and presumption

Remote sales are sourced to the purchaser's known California address in this priority: billing address, then shipping/delivery address, then payment instrument address, then mailing address. Place of use is where the person accessing the software is located. Purchases made outside California but used within the state within 90 days carry a presumption of California use.

Practical effects for buyers and vendors

• Price increase: Buyers should budget an added 8–10% for taxable software spend. For a company spending $2M a year on tools, that means roughly $160K–$200K of additional cost.

• Bundling matters: If a contract is billed as a single line item that includes software access plus services, the whole bundle may be taxable. Separately stated charges for implementation, support, and managed services can reduce the taxable portion.
• Compliance burden: Large buyers crossing the $5M vendor threshold must implement new processes for self-assessment, exemption certificates, and local tax reporting.

• Ask your top vendors how they will invoice and whether they will collect California sales tax starting January 1, 2027.
• Run a vendor-by-vendor analysis to see who might push you past the $5M self-assess threshold.
• Review contracts for bundling language and consider negotiating separately stated fees for non-taxable services.
• Prepare finance and tax teams for registration, permit applications, and local tax reporting if self-assessment will apply.