California has enacted Senate Bill 122 (SB 122), significantly expanding the state's sales and use tax base to include many software transactions. Effective January 1, 2027, prewritten computer software will be treated as taxable tangible personal property regardless of how it is delivered, including software transferred electronically or accessed remotely through software-as-a-service (SaaS) arrangements.

Taxable Transactions

Beginning January 1, 2027, California will impose sales and use tax on prewritten computer software in each of the following delivery or access formats:

• Delivered on tangible media
• Downloaded or otherwise transferred electronically
• Accessed remotely through a SaaS or cloud-based arrangement

Notably, SB 122 extends taxation to software accessed on a vendor's or third-party server, representing a significant change for businesses that sell or purchase SaaS solutions.

What Remains Exempt

The legislation does not broadly tax all digital products. Several categories remain outside the scope of the new rules, including:

• Digital books
• Digital audio and audiovisual works
• Digital video game products
• Digital visual works
• Cryptographically secured digital assets
• Certain cloud-based infrastructure and platform services classified as "digital infrastructure"
• Custom software, including separately stated custom modifications to prewritten software

As a result, California's long-standing exclusion for custom software generally remains intact.

Services and Sourcing Considerations

SB 122 also provides an exemption for electronically delivered services when the primary value provided to the customer is human expertise rather than access to software. However, this exemption generally does not apply when customers are purchasing the right to use software through a cloud-based platform.

The legislation establishes sourcing rules for electronically delivered and remotely accessed software, generally sourcing transactions to the purchaser's known California address. It also includes exemptions for software purchased exclusively for use outside California. Additional guidance from the California Department of Tax and Fee Administration (CDTFA) is expected, particularly regarding multistate and multiple-points-of-use transactions.

Once a purchaser’s electronically delivered or remotely accessed software purchases from a single retailer exceed $5 million in a calendar year, the obligation may shift from retailer collection to purchaser self-assessment and remittance of use tax. This is a major compliance issue for large enterprise customers and software vendors.

What Businesses Should Do Now

Although the law does not take effect until January 1, 2027, businesses should begin evaluating its impact now by considering the following actions:

• Determining whether offerings are taxable prewritten software, exempt services, or exempt custom software
• Reviewing SaaS contracts and multistate licensing arrangements
• Evaluating customer location and sourcing methodologies
• Updating tax determination, billing, collection, and use tax accrual processes
• Assessing the potential financial and operational impact of the expanded tax base

How RubinBrown Can Help

RubinBrown's State and Local Tax Services team can help businesses evaluate the impact of SB 122, identify compliance obligations, and develop practical strategies to prepare for the new requirements before the January 1, 2027 effective date.

Published: 09/08/2026

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