An overview
California Governor, Gavin Newsom, signed Senate Bill 122 (SB 122) into law, expanding the state’s sales and use tax beyond prewritten computer software. Beginning January 1, 2027, the tax will apply to software delivered through physical media, digital downloads, or remote access, including most software as a service (SaaS) offerings.
With this new law, California joins more than 20 states that tax SaaS in some form.
What is changing?
SB 122 is redefining Revenue and Taxation Code Section 6016 to treat digital products as tangible personal property (TPP).
- What is now taxable? Prewritten software delivered on media, downloaded, or accessed remotely, including any transfer of rights to access, use, download, or manipulate a digital product.
- What is still exempt? Custom software, prepared for the special order of a single customer.
- What is outside the definition? Digital infrastructure, digital assets, audio works, and audiovisual works.
Sourcing follows the delivery method
Sourcing will depend on how the product is delivered.
- Sales involving tangible media are sourced to the location where the transfer occurs
- In-person sales are sourced to the seller’s place of business
- Remote sales are sourced to the customer’s billing address
If a purchaser buys more than $5 million in digital products from a single retailer, the responsibility for collecting and remitting the tax may shift to the purchaser, who would pay the use tax directly to the California Department of Tax and Fee Administration (CDTFA).
Who is affected?
- SaaS sellers – newly taxable receipts count toward California’s $500,000 economic nexus threshold.
- Software buyers – accrual processes need to flag taxable purchases and self-assess use tax.
- Manufacturers and research-driven companies – partial exemptions may now reach software purchases.
What should you do before January 1, 2027?
While the effective date is fixed, several of the rules are not. To prepare for SB 122:
- Classify every product and SKU against the digital product definition
- Test billing systems and tax engines for correct state, local, and district rates
- Model annual spend by vendor against the $5 million rule
- Check interstate use, manufacturing, and research and development (R&D) exemptions
- Revisit contracts, pricing, and the 2027 budget to reflect the added cost
While the SB 122 is the widest expansion of California’s sales and use tax base in decades, the costly part is the piece no one looked at: the SKU that was never classified or the renewal priced without tax.
Aprio’s State and Local Tax team can help software companies and software buyers with taxability analysis, nexus studies, system readiness, and exemption planning.