- [SaaS](/blog/topics/saas) # Is SaaS Taxable in California? SB 122 Rules for 2027 [![Jennifer Dunn](https://cdn.sanity.io/images/jldqsjg6/production/f4e992938370233aee8323439f74067030161c1b-1486x1059.png?q=80&fit=max&auto=format&w=3840)](/author/jennifer-dunn) [Jennifer Dunn](/author/jennifer-dunn) 12 November 2026 ![California](https://cdn.sanity.io/images/jldqsjg6/production/ee26870c4d8b5747ffdd2e9682590b18f831a0de-2616x1744.png?q=80&fit=max&auto=format&w=3840) - Is SaaS Taxable in California Today? - What SaaS and Software Become Taxable Under SB 122 - Does SB 122 Apply to Your Business? - California SaaS Sales Tax Rate and Sourcing Rules - Who Collects California SaaS Tax: Sellers vs. Large Purchasers - What Happens to Existing Contracts and Prepaid Subscriptions - How Tax Engines Handle a Law Change Like SB 122 - SB 122 Compliance Checklist: How to Prepare Before January 1, 2027 - California SaaS Tax Starts January 1, 2027: Prepare Now Explore with ChatGPT IconClaude IconPerplexity Icon SaaS is not taxable in California today, but it becomes taxable on January 1, 2027. California Senate Bill 122 (SB 122) extends sales and use tax to prewritten software delivered electronically or accessed remotely, including software-as-a-service (SaaS). Some products, like cloud infrastructure and digital media, stay excluded from sales tax. Governor Gavin Newsom signed [SB 122](https://leginfo.legislature.ca.gov) on June 29, 2026 as part of California's 2026-27 budget package. The law affects both software sellers and software buyers. This guide covers what becomes taxable in 2027, who has to collect, how sales tax sourcing works, what happens to existing contracts, and a step-by-step checklist to get SaaS businesses ready for the update. Key Takeaways - SaaS becomes taxable in California on January 1, 2027, under SB 122. - SB 122 adds "digital product" to California's definition of tangible personal property. - IaaS, PaaS, digital media, digital assets, and truly custom software stay excluded. - Remote sellers with more than $500,000 in California sales must register and collect. - The statewide base rate is 7.25%, plus district taxes of 0.10% to 2.00%. - Buyers who spend more than $5 million a year with one vendor pay the tax directly to the state. - Tax follows the service period, so prepaid deals that cross into January 1, 2027, are affected. ## Is SaaS Taxable in California Today? No. SaaS is not taxable in California until January 1, 2027. Right now, California only taxes prewritten software when it's sold on tangible storage media, like a disc or USB drive. Software that's downloaded or accessed online is not taxed in 2026. That changes when SB 122 takes effect. The law adds "digital product" to California's definition of tangible personal property in Revenue and Taxation Code 6016. Once software counts as tangible personal property, it follows the same sales and use tax rules as physical goods. It's important to note that many older pages still say SaaS isn't taxable in California. Those pages describe the rule before SB 122. They're accurate for 2026 sales only. For a broader look at the state, see Sphere's [California sales tax](/blog/california-sales-tax) article. ### Why SB 122 Is Catching Finance Teams Off Guard SB 122 is catching finance teams off guard because many software sellers never registered in California. Their product wasn't taxable, so there was nothing to collect. Now the topic comes up constantly in buying conversations. Between June 29 and October 12, 2026, California's SaaS tax came up in 80 of 577 recorded Sphere sales calls. That's approximately 1 in 7 calls. In at least 17 of those calls, prospects raised the topic on their own. At Sphere, we hear from clients and prospects comments like: "We always thought we didn't have to collect in California, one of our biggest markets. This is going to create a lot of new work for our finance team." ## What SaaS and Software Become Taxable Under SB 122 Almost all prewritten software sold to California customers becomes taxable under SB 122, no matter how it's delivered. That includes [SaaS](/blog/are-subscriptions-taxable), downloads, and software on physical media. ### The Digital Product Definition A digital product is prewritten computer software that is transferred on tangible storage media, transferred electronically, or accessed remotely. This definition lives in the new Revenue and Taxation Code 6016.1. The definition covers most ways you sell the right to use software: - Perpetual licenses - Term licenses - Subscriptions - Remote access, such as a web-based SaaS platform In practice, this reaches everyday business tools. Collaboration platforms, video conferencing apps, project management tools, accounting and tax software, and most subscription business apps all fall inside the definition. Mandatory add-on charges generally stay in the taxable amount too. If a customer must pay maintenance, license fees, or other required charges to use the software, those charges are usually taxed along with it. Learn [how subscription taxability works in other states here](/blog/are-subscriptions-taxable). ### What Stays Excluded or Exempt SB 122 excludes seven categories from the digital product definition. These stay outside California sales tax after January 1, 2027: - **Digital assets**, such as cryptocurrency - **Digital audio works**, such as music downloads - **Digital audiovisual works**, such as movies and streamed video - **Digital books** - **Digital infrastructure**, meaning infrastructure as a service (IaaS) and platform as a service (PaaS) - **Digital video game products** - **Digital visual works** Other carve-outs also apply: - **Custom software.** Software prepared to the special order of a single customer stays non-taxable. This exemption is narrow. Configuring a prewritten product for one client doesn't make it custom. - **Resale.** Software bought for resale, such as a "golden master" copy, stays exempt with a valid resale certificate. - **Human-effort services.** Services performed by people, like consulting or implementation work, are not digital products. Keep them separately stated on invoices. - **Use solely outside California.** Digital products used only outside California, or in interstate or foreign commerce, are exempt under § 6372. You're relieved of liability if you take a good-faith exemption certificate from the buyer. This exemption does not apply to software on tangible media. - **Technology transfer agreements.** This exclusion ends for agreements entered into on or after January 1, 2027. **Product Type** **Before SB 122** **From Jan 1, 2027** **Source** **SaaS and remotely accessed prewritten software** Not taxable Taxable RTC 6016, 6016.1 **Electronically downloaded prewritten software** Not taxable Taxable RTC 6016, 6016.1 **Prewritten software on tangible media** Taxable Taxable RTC 6016 **Mandatory maintenance and license fees** Taxable with media sales Generally taxable Proposed Reg. 1600 **IaaS and PaaS (digital infrastructure)** Not taxable Excluded RTC 6016.1; Proposed Reg. 1600 **Digital books, audio, audiovisual, and visual works** Not taxable Excluded RTC 6016.1 **Digital video game products** Not taxable Excluded RTC 6016.1 **Digital assets (such as cryptocurrency)** Not taxable Excluded RTC 6016.1 **Custom software for a single customer** Not taxable Not taxable RTC 6010.9; Proposed Reg. 1502.2 **Digital products used solely outside California** Not taxable Exempt with certificate RTC 6372; Proposed Reg. 1600.3 **Technology transfer agreements** Excluded Exclusion ends for new agreements Proposed amended Reg. 1507 ### How AI Software Is Treated Under SB 122 Prewritten AI software is taxable under SB 122, just like any other SaaS. An AI writing assistant, AI coding tool, or AI analytics platform sold to many customers counts as a digital product. AI-generated outputs don't change that. A tool that creates a unique report or image for each user is still prewritten software. The output may be one-of-a-kind, but the platform isn't custom. Usage-based and API pricing is still a gray area. SB 122 doesn't directly address per-token or per-call pricing, and CDTFA guidance is still developing. Treat this as unresolved and watch for the final regulations. ## Does SB 122 Apply to Your Business? SB 122 applies to your business if you sell taxable software to California customers and you have [sales tax nexus](/blog/nexus-tax-software) in California. Both conditions must be true. If everything you sell falls into an exclusion, you're out of scope, even with nexus. Buyers have obligations too. If you buy software for use in California, you'll see tax on vendor invoices starting in January 2027. In some cases, you'll pay use tax yourself. ### The California Nexus Test You have California nexus if you have a physical presence in the state or if your sales cross California's economic nexus threshold. Physical presence includes an office, employees, or inventory in California. The economic nexus threshold is more than $500,000 in combined sales of tangible personal property for delivery in California. The total includes sales by the retailer and all related persons or entities, in the current or preceding calendar year. It's vital to note that once software becomes tangible personal property, newly taxable software sales count toward the $500,000 threshold. A remote software company with large California revenue can find itself over the threshold without changing anything about how it sells. Learn more about [nexus tracking here](/blog/nexus-tax-software). ### Why Taxability Must Be Decided per Product Nexus alone doesn't tell you whether to collect. You also need to know whether each product is taxable in California. California is the most populous state in the US, so many software companies already have California nexus. They just haven't had to register because nothing they sell is taxable. In Sphere's platform, these accounts show up as "nexus triggered, product not taxable." For most software catalogs, that status flips to "register and collect" on January 1, 2027. Tools that only track sales thresholds might miss this vital change. ## California SaaS Sales Tax Rate and Sourcing Rules California SaaS sales tax uses the same rates as other taxable sales: a 7.25% statewide base rate plus local district taxes. The customer's address determines which district taxes apply. ### How the Total Rate Is Built In California, the total sales tax rate has two parts: - **Statewide base rate:** 7.25% - **District taxes:** 0.10% to 2.00% each, with some areas stacking more than one Because of district taxes, combined rates vary widely across the state. Some combined rates top 10%. You can look up current [California sales tax rates here](https://www.cdtfa.ca.gov/taxes-and-fees/rates.aspx). A single statewide rate won't give you the right answer. Sphere calculates tax per transaction at the address level, so each invoice reflects the correct district taxes. ### Which Customer Address Determines the Tax SB 122 sources most digital product sales to the customer's California address. In-person sales at a seller's California location are sourced to California. For all other sales, you use the first address you know from this list (§ 6010.5): 1. Billing address 2. Shipping or delivery address 3. Mailing address tied to the payment instrument 4. Any other mailing address If you can't determine any address, the sale is treated as outside California. There's also a 90-day rule. Software bought outside California but used in the state within 90 days is presumed to be bought for use in California. It's important to note that this hierarchy differs from the Streamlined Sales and Use Tax Agreement (SSUTA). If you sell into SSUTA states, don't assume your current sourcing logic carries over to California. ### Software Used in Multiple Locations Buyers who use software both inside and outside California can apportion the tax with a multiple points of use (MPU) certificate. This rule comes from CDTFA's proposed Regulation 1600.2, not from the SB 122 statute. Under the proposal (which has not yet passed), buyers can use any reasonable method that is consistent and uniform to determine the tax for software used in multiple locations. This includes user counts, device counts, and user-based allocation. Server location is not considered a reasonable method. Sellers who receive a valid MPU certificate in good faith are relieved of liability for the out-of-state share of the tax. Because this is a proposed rule, details may change before the final version. You can [track the proposed regulations here](https://cdtfa.ca.gov/taxes-and-fees/business-taxes-committee.htm/regscont.htm). ## Who Collects California SaaS Tax: Sellers vs. Large Purchasers Sellers collect California SaaS tax in most cases. The exception is very large buyers. Once a buyer spends more than $5 million in a year with one vendor, the buyer pays the tax directly to the California Department of Tax and Fee Administration (CDTFA). ### The $5 Million Large-Purchaser Rule Under California code 6052, if a buyer purchases more than $5 million in digital products from a single retailer in a calendar year, the retailer is relieved of collecting the tax. The buyer then self-assesses use tax and pays the CDTFA directly. Key details: - The buyer needs a use tax direct payment permit, or can request a waiver to shift collection back to the seller. - Starting in 2028, the test looks at the current or preceding calendar year. - The $5 million threshold is indexed for inflation starting in 2031. This rule changes who remits the tax, but it is not a sales tax exemption. The tax is still due on the purchase. For sellers, this creates a tracking job. You need to know which customers hold direct payment permits, so you stop charging tax only on qualifying sales. Sphere stores permits and [exemption certificates](/blog/exemption-certificate-management), so tax is suppressed only on transactions that qualify. Learn more about [Direct Pay Permits here](/blog/direct-pay-permit). ### What Software Buyers Should Plan For If your business buys software for use in California, plan for higher software costs in 2027. Most vendors will add California sales tax to invoices for service periods starting January 1, 2027. Take these steps now: - Budget for tax on 2027 software invoices. - Accrue use tax when a vendor doesn't charge California tax. - Collect MPU certificates (see above) if your teams use software in several states. ## What Happens to Existing Contracts and Prepaid Subscriptions California SaaS tax follows the service period, not the signing date or invoice date. Payments for service periods on or after January 1, 2027, are taxable, no matter when you signed the contract or sent the invoice. Payments for periods before that date are not taxable. This matters most for annual prepaid and multi-year deals. Say a customer prepays a 12-month subscription that runs from July 1, 2026, to June 30, 2027. The first six months are not taxable. The last six months are. To handle this, you may need to: - Amend contracts to address tax on service periods after 2026 - Split billing at January 1, 2027 - Update pricing language so customers know tax will be added ## How Tax Engines Handle a Law Change Like SB 122 A law change like SB 122 reaches your tax engine in one of two ways: through manual research updates or through continuous AI monitoring. The difference is how quickly you learn what's affected. Traditionally, tax content providers rely on human research teams. They read the new law, update rate and taxability tables, and push changes to customers. You're then left to work out which products and customers are affected, whether to register, and when. Sphere takes a different approach. TRAM, Sphere's AI tax engine, monitors legislation and agency guidance continuously. For SB 122, TRAM: - Maps the law change to each customer's product tax codes - Flags customers who move from "nexus triggered, not taxable" to "must register and collect" - Calculates tax at the address level, including district taxes - Tracks CDTFA's proposed regulations as they change That last point is key. CDTFA's regulations are still emergency rules, and final versions are expected around December 2026. Continuous monitoring catches those updates without a manual recheck. Read more about how Sphere's [Tax Review and Assessment Model (TRAM) works here](/blog/building-tram). ## SB 122 Compliance Checklist: How to Prepare Before January 1, 2027 To prepare for SB 122, confirm nexus, classify your products, register early, and update your systems before January 1, 2027. Each step below names the output you should have when it's done. 1. **Confirm nexus by entity.** Check each legal entity's California sales, including related persons, against the $500,000 threshold. Output: a nexus summary for every entity. 2. **Classify every product.** Sort each SKU into taxable (prewritten software or SaaS) or excluded (IaaS, PaaS, digital media, custom software, separately stated services). Output: a California taxability matrix. (Note: Sphere automates this.) 3. **Register with CDTFA early.** [Apply for a California seller's permit](https://onlineservices.cdtfa.ca.gov) if you don't already have one. Sphere advises exposed customers to start registrations in November, ahead of an expected rush. Output: an active seller's permit and online account. 4. **Clean up customer address data.** Capture billing and shipping addresses for every California customer. Output: address records for all customers. 5. **Set up certificate collection.** Build a process for out-of-state use, MPU, and resale certificates. Output: a certificate workflow with secure storage. Learn [more about certificate management here](/blog/exemption-certificate-management). 6. **Review contracts that cross January 1.** Find annual, prepaid, and multi-year deals that span the date. Output: a list of contracts that need amendments or split billing. 7. **Flag customers likely to cross $5 million.** Identify buyers near the large-purchaser threshold. Output: a watch list with each customer's direct payment permit status. 8. **Configure and test your tax engine, or automate it with Sphere.** Set up California taxability, sourcing, and exemptions, then run test transactions. Output: tested tax calculations ready for January invoices. 9. **Track CDTFA guidance.** Watch for final regulations and updates. Output: an owner for California sales tax and a regular review schedule. Don't wait for final regulations. The legal obligation starts on January 1, 2027, either way. ## California SaaS Tax Starts January 1, 2027: Prepare Now California SaaS sales tax starts January 1, 2027, and whether you owe it depends on two things: product classification and nexus. You need both answers for every product you sell. SB 122 is more than a rate change. Sourcing rules, the $5 million large-purchaser rule, and service-period timing all add work. Starting now gives you time to register, clean up your data, and fix contracts before the first taxable invoice goes out. See a [state-by-state view of SaaS rules here](/blog/saas-sales-tax). ## Frequently asked questions When does California start taxing SaaS? Does SB 122 tax cloud hosting or IaaS? Does SB 122 tax digital media like ebooks, music or video games? Is AI software taxable under SB 122? ![](/images/blog-post-cta-bg.avif) Ready to automate California SaaS sales tax compliance? 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