California Extends Sales Tax to Prewritten Software and SaaS, Effective January 1, 2027

July 20, 2026

Beginning January 1, 2027, businesses that sell software or Software-as-a-Service (SaaS) to customers in California (or businesses that purchase it) will be subject to the state’s sales and use tax for the first time.

This change comes as part of California’s state budget, signed on June 29, 2026. Senate Bill 122 (S.B. 122) extends California’s sales and use tax to prewritten software and (SaaS). This is a significant shift for the state, which has long been one of the few large states not to tax software delivered electronically or accessed remotely.

Here, we summarize what’s changing, who is affected, and what steps to take prior to year-end.

What’s Changing

Historically, California has taxed sales of tangible personal property but has generally exempted downloaded and remotely accessed software as an intangible good. S.B. 122 narrows that exemption considerably. Beginning January 1, 2027, California’s sales and use tax (the 7.25% state base rate, plus applicable local district taxes) will apply to:

• Prewritten (also called “canned”) software, regardless of delivery method
• SaaS and other remotely accessed software
• Electronically downloaded software
• AI tools and platforms, which California treats as prewritten software

The following categories remain exempt:

• Custom software developed specifically for a single customer
• Infrastructure-as-a-service (IaaS)
• Digital books, newsletters, and audiovisual works
• Cryptocurrency and other digital assets
• Video games

The key distinction is prewritten versus custom. Software sold in substantially the same form to multiple customers is prewritten and taxable; software built from the ground up for one client remains exempt. When a prewritten product is modified for a customer, only the custom modification itself may qualify for the exemption, while the underlying prewritten software remains taxable. Bundled offerings and configurable platforms will require a closer, fact-specific look.

Who Does This Affect

A business is required to collect and remit California tax on its software or SaaS sales only if two conditions are both met: the product itself is taxable (prewritten software or SaaS, not custom software or IaaS), and the business has California nexus. Although nexus can be triggered in numerous ways, it is most commonly established by either of the following:

• Physical nexus: The business has employees, an office, or property in the state of California.
• Economic nexus: The business has more than $500,000 in gross sales to California customers in the current or prior calendar year (note that newly taxable software revenue now counts toward this threshold);

What To Do Before January 1, 2027

Businesses have six months to prepare for this shift, but registration, billing-system updates, and product classification all take real lead time, and CDTFA registration volume is expected to climb sharply as the deadline nears. Businesses should treat this as a project to start now rather than in the fourth quarter:

1. Confirm nexus. Determine whether current or prior-year California sales exceed $500,000, or whether the business otherwise has a physical presence in the state. Registration with the CDTFA can be submitted up to 90 days before the effective date.
2. Classify products. Work through the product catalog against the prewritten-versus-custom distinction, paying particular attention to bundled or configurable offerings.
3. Update billing and tax systems. Confirm that invoicing systems can identify each customer’s California location, apply the correct combined state-and-district rate, and reflect it automatically starting day one.
4. Collect exemption and resale certificates. Identify California business customers that may qualify as resellers or exempt entities and collect valid certificates before January 1. Without one on file, tax typically must be charged.
5. Review contracts that straddle the effective date. Existing annual contracts that span the effective date raise open questions the statute does not directly address; review exposure on a contract-by-contract basis.
6. Communicate with customers early. Customers will see a new tax line item beginning January 1; getting ahead of that conversation, particularly with larger accounts, helps avoid billing disputes.

Frequently Asked Questions

Will all of our California software sales become taxable on January 1?

Not automatically. Two things have to be true: the product must be prewritten software or SaaS (not custom software or IaaS), and the business must have California nexus. A business with no nexus in California has no collection obligation under this change.

We have no office or employees in California. Are we still affected?

Potentially, yes. Economic nexus is based on sales volume ($500,000 in California sales), regardless of physical presence, so a business can be in scope without ever having set foot in the state.

What happens to annual contracts that span January 1, 2027?

This is an open area the law doesn’t directly resolve. Contracts signed before the effective date but running past it should be reviewed individually, ideally with guidance from a tax advisor.

Moving Forward

S.B. 122 is one of the more significant U.S. state software tax changes in recent years, and California’s size means many businesses will be affected. Companies that prioritize registration, billing updates, and customer communication now will be far better positioned when the rule takes effect than those that wait until late in the year.