California sales tax on SaaS (effective 2027)

Overview

California enacted SB 122 as part of its FY 2026–2027 budget, a significant change to how digital transactions are taxed in the state. Beginning January 1, 2027, California will impose sales and use tax on prewritten computer software, whether it is transferred on tangible storage media, transferred electronically, or accessed remotely. In practice, this means most SaaS sold to California customers becomes taxable.

The bill adds digital product to California's definition of tangible personal property. Custom computer software — software prepared to the special order of a single customer — remains exempt, consistent with California's longstanding treatment.

What is taxable and what is excluded

The tax applies to prewritten computer software delivered in any form, including SaaS. Several categories are expressly excluded from the definition of digital product and remain outside California sales tax:

• Digital assets
• Digital audio works
• Digital audiovisual works
• Digital books
• Digital video game products
• Digital visual works
• Digital infrastructure

Digital infrastructure is a cloud-based service that lets a user create, deploy, scale, or run their own software on the service provider's platform without managing the underlying infrastructure — in other words, IaaS and PaaS offerings.

SB 122 does not include a broad B2B exemption. If you purchase SaaS for your own business use, that purchase is generally taxable. Standard resale certificates continue to apply where you are acquiring software for resale.

Sourcing and multiple points of use (MPU)

California uses destination-based sourcing for digital products transferred electronically or accessed remotely. For sales that are not made in person, the place of sale is the purchaser's known California address. When a buyer provides more than one address, California applies the following priority order:

1. Billing address
2. Shipping or delivery address
3. Address associated with the payment instrument
4. Mailing address

SB 122 does not include a dedicated MPU apportionment framework. Under the default sourcing rule, a SaaS license sourced to a California billing address is fully subject to California tax, even when the buyer's users are spread across multiple states.

Under the existing exemption certificate framework, a seller who accepts a valid exemption certificate in good faith is relieved of collecting tax on the portion of a transaction used solely outside California. If your buyer certifies in writing that part of a purchase is for use outside California, use tax liability on that portion shifts to the buyer.

RTC § 6372(e)(1) gives the CDTFA discretionary authority to establish alternative calculation methods for digital products that are concurrently available for use in multiple locations. No such guidance has been issued as of this writing.

Large-buyer direct pay ($5 million threshold)

SB 122 lets sellers be relieved of the tax collection obligation on their largest customers. In 2027, if a buyer's aggregate purchases of digital products from you exceed $5 million in a calendar year, you are relieved of the obligation to collect tax on that buyer. The buyer becomes directly liable for use tax and must obtain a use tax direct payment permit from the CDTFA.

• Per-seller basis — the threshold is measured separately for each seller.
• When relief starts — relief applies beginning with the transaction that causes the threshold to be exceeded.
• Look-back from 2028 — starting in 2028, the $5 million threshold is measured by purchases in the current or preceding calendar year.
• Inflation adjustment — the $5 million amount is adjusted for inflation every five years beginning in 2031.

Registration and rates

No new registration type is required. Existing CDTFA seller's permits will cover digital product transactions beginning January 1, 2027. If you are not currently registered in California, you will need to evaluate whether you have economic or physical nexus; California's economic nexus threshold is $500,000 in gross sales in the current or preceding calendar year. In Anrok, you can monitor your nexus status in jurisdictions to track where you may have an obligation.

The California state sales tax rate is 7.25%, with additional local district taxes that vary by jurisdiction. Your SaaS transactions will be subject to the same rate structure as any other taxable sale.

Open items pending CDTFA guidance

Several areas are not yet resolved and await CDTFA rulemaking or administrative guidance:

• $5 million large-purchaser relief — the bill does not address the practical implications of this relief for sellers.
• MPU apportionment methodology — the CDTFA has discretionary authority but has not yet acted.
• Exemption certificate formats — for out-of-state use claims and direct pay.
• Bundled transactions — treatment of invoices that combine taxable digital products with nontaxable services.

Anrok is monitoring CDTFA rulemaking and will update this article as guidance is issued.