California SaaS Sales Tax: SB 122 Explained for 2027

What Is California SB 122?

California Senate Bill 122 is a budget-related tax law signed by Governor Gavin Newsom on June 29, 2026.

The law expands California's definition of tangible personal property to include certain digital products. Most significantly for businesses, it defines a digital product to include prewritten computer software that is:

• Delivered on physical media
• Downloaded electronically
• Accessed remotely through the cloud

The software-related provisions become operative on January 1, 2027. When they take effect, SaaS and other taxable software purchases will be subject to California's 7.25% statewide sales and use tax rate, plus any applicable local district taxes based on the purchaser's location.

Historically, electronically delivered and remotely accessed software was generally outside California's sales and use tax system. SB 122 changes that treatment by taxing prewritten software regardless of how customers receive or access it.

This guide focuses primarily on California businesses and nonprofits that purchase software. Software vendors may have additional registration, collection, sourcing, and reporting responsibilities.

Does SB 122 Apply to SaaS Subscriptions?

Generally, yes.

SB 122 treats the temporary or permanent right to access, open, download, update, store, manipulate, or otherwise use prewritten software as a taxable transaction beginning January 1, 2027. That language is broad enough to cover many cloud-based SaaS subscriptions and hosted business applications.

Common examples may include:

• Accounting and bookkeeping software
• Customer relationship management platforms
• Project-management tools
• Payroll and human-resources systems
• Expense-management platforms
• Reporting and analytics software

The key question is whether the customer is purchasing access to prewritten software. Not every digital or cloud-based service will be taxable.

What Is Taxable Under SB 122?

Custom software generally remains exempt when it is prepared to the special order of one customer. However, prewritten software does not become custom software simply because it is configured for a customer. Only qualifying custom modifications may remain exempt.

SB 122 also excludes digital infrastructure from its definition of a taxable digital product. The statute describes digital infrastructure as a remotely provided cloud service that allows customers to create, deploy, scale, or run their own software without managing the underlying infrastructure.

Because the distinction between SaaS, infrastructure, custom development, and professional services can be complicated, businesses should avoid applying one tax treatment to every technology vendor.

Are Consulting and Other Electronic Services Taxable?

SB 122 includes an exemption for certain services delivered electronically when:

• The service primarily involves human effort by the provider.
• That human effort begins after the customer requests the service.

The exemption does not apply when the customer is primarily purchasing the right to access or use the provider's software.

This distinction may affect consulting, data analysis, implementation, managed services, and hybrid software-service agreements.

A contract that includes both software access and professional services may require closer review. The name used on the invoice does not necessarily determine whether the transaction is taxable.

Where Is a SaaS Sale Taxed?

For remotely accessed or electronically delivered software, SB 122 generally sources the sale to the purchaser's known California address in the seller's records.

When multiple addresses are available, the law prioritizes them in this order:

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

The law also defines the place of use as the location where the person accessing the software is physically located.

This creates additional complexity for organizations with:

• Remote employees
• Multiple California offices
• Users in several states
• Centralized software contracts
• Licenses allocated among departments or entities

Businesses should maintain accurate billing records and, where practical, understand where their software users are located.

What Is the $5 Million Threshold?

The $5 million threshold does not generally refer to a company's total software spending across every vendor.

It applies when purchases of electronically delivered or remotely accessed digital products from a particular retailer to a particular purchaser exceed $5 million in aggregate during the applicable calendar-year period.

Once the $5 million threshold is crossed, the purchaser generally becomes responsible for reporting and paying use tax beginning with the transaction that caused the threshold to be exceeded and all subsequent spend. The purchaser may also need a use-tax direct-payment permit.

This provision will primarily affect organizations with very large software relationships. Most small and midsize businesses will continue to pay applicable tax through their software vendors.

How Should Your Business Prepare?

Businesses do not need to wait until 2027 to begin preparing.

1. Audit your software vendors

Create a list of every software subscription and license your organization purchases.

Separate vendors into categories such as:

• Prewritten SaaS
• Custom software
• Cloud infrastructure
• Human-delivered services
• Hybrid software and service contracts

2. Improve software-spend categorization

Use clear chart-of-accounts categories for software, cloud infrastructure, implementation services, and consulting.

Clean categorization will make it easier to evaluate tax treatment, review invoices, and model the financial impact.

3. Review vendor invoices and contracts

A single invoice may include taxable software, exempt custom work, and professional services.

Confirm that vendors separately state different components when appropriate. This can help prevent the entire transaction from receiving the wrong tax treatment.

4. Confirm address and user-location data

Review the billing addresses attached to major software accounts. Organizations with remote or multistate teams should also consider whether they can identify license usage by state or office.

5. Model the 2027 budget impact

Adding sales tax to a large software stack may have a meaningful effect on operating budgets.

Nonprofits should pay particular attention to fixed grant and program budgets. Growth-stage companies should include the additional cost in cash-flow forecasts and departmental planning.

6. Escalate uncertain classifications

Custom development, digital infrastructure, hybrid services, and multistate usage may require transaction-specific analysis.

Consult a qualified CPA, tax attorney, or sales-tax advisor when the treatment is unclear. Businesses should also monitor implementation guidance from the California Department of Tax and Fee Administration.

Frequently Asked Questions

Does SB 122 tax SaaS subscriptions?

Generally, yes. Beginning January 1, 2027, remotely accessed prewritten software will generally be subject to California sales and use tax. Custom software, qualifying services, and digital infrastructure may receive different treatment.

Does SB 122 apply to nonprofits?

The law does not establish a broad exemption for software purchased by nonprofit organizations. Nonprofits should therefore review their SaaS subscriptions and include potential sales tax in their 2027 budgets.

Is custom software taxable?

Software prepared to the special order of one customer is generally exempt. Prewritten software remains taxable even when it is configured for a customer, although separately stated qualifying custom modifications may be exempt.

What should businesses do before January 1, 2027?

Start by auditing software vendors, improving accounting categories, reviewing address and user-location data, and estimating the budget impact. Ambiguous contracts should be reviewed with a qualified tax professional.

Prepare Your Accounting System for SB 122

Accountix can help your organization organize software spending, improve vendor records, strengthen accounting categories, and incorporate the potential tax impact into its 2027 budget.

For legal interpretations and final taxability determinations, Accountix can coordinate with your CPA or sales-tax advisor.

This article is for general informational purposes and does not constitute legal or tax advice. Consult a qualified tax advisor or CPA about your organization's specific circumstances.