California SaaS Sales Tax in 2027: Is Your Software Taxable Under SB 122?

Beginning January 1, 2027, California will charge sales tax on SaaS and prewritten software under Senate Bill 122 (SB 122). For more than three decades, California has exempted most electronically delivered software and Software-as-a-Service from sales and use tax. That era is ending. Governor Gavin Newsom signed SB 122 into law on June 29, 2026, expanding California’s sales and use tax to cover prewritten computer software no matter how it is delivered (downloaded, on physical media, or accessed remotely in the cloud). If you sell software subscriptions to California customers, or your business buys them, this change likely affects you.

I’ve watched the digital economy reshape how entrepreneurs build companies, and the California SaaS sales tax is one of the most consequential state tax shifts I’ve seen for software founders in years. Below, I’ll answer the questions software businesses are asking most: what SB 122 taxes, whether your product is taxable, what stays exempt, and how to register for sales and use tax before the deadline.

Does California Tax SaaS and Software Subscriptions?

Starting January 1, 2027, yes. California’s statewide 7.25% sales and use tax, plus any applicable local district taxes, will apply to prewritten software and SaaS sold to California customers. Until then, most SaaS and electronically delivered software remains exempt, because California has historically taxed only “tangible personal property” you could physically see or touch.

SB 122 rewrites that rule. It redefines tangible personal property to include digital products, specifically prewritten (or “canned”) computer software, so the delivery method no longer matters. With this change, California joins more than 20 states that already tax SaaS in some form. State analysts project the expansion could raise well over a billion dollars in combined annual revenue, a sign of how large California’s software subscription economy has become.

Which Software and SaaS Products Are Taxable in California?

SB 122 casts a wide net over modern software delivery. Based on the statute and early guidance from tax professionals, the following are generally expected to be taxable:

• Prewritten (canned) software sold to the general public, whether downloaded or on physical media
• Software-as-a-Service (SaaS) platforms and subscription-based applications
• Cloud-accessed and remotely hosted software
• Enterprise software, productivity, accounting, HR, CRM, and data-analytics subscriptions used in California
• Any transfer of the right to access, use, download, or manipulate a covered digital product

In short, if you sell the same software to many customers over the internet, it is almost certainly prewritten, and almost certainly in scope.

What Software Is Exempt from California Sales Tax?

SB 122 does not tax every digital product. The law specifically continues to exempt several categories, including:

• Custom software prepared to the special order of a single customer
• Digital assets, such as cryptocurrency recorded on a distributed ledger
• Digital audio and audiovisual works, including streamed music and movies
• Digital books and digital video games
• Certain cloud infrastructure services that let a user run their own software on a third-party platform

The key dividing line is prewritten versus custom. Sell the same product to many customers and it’s taxable; build it from scratch for one client and it generally stays exempt. Bundled offerings, and separately stated setup, training, or professional-services charges, can get nuanced fast. The compliance question is shifting from “how was it delivered?” to “what, exactly, is being sold?” That classification analysis is a conversation to have with your CPA or tax attorney well before the effective date.

How Does the California SaaS Tax Affect Startups in the AI Era?

We are living through an extraordinary wave of technological entrepreneurship. AI tools, no-code platforms, and cloud infrastructure have made it easier than ever to launch a software product, and most of those products are sold as subscriptions. Many of today’s fastest-growing companies are, at their core, prewritten software delivered over the internet.

That’s exactly the segment SB 122 reaches. An AI-powered app, an automation platform, a developer tool, or a vertical SaaS product used by California customers may now carry a sales tax obligation it never had before. For founders who built lean, digital-first companies specifically to avoid the overhead of traditional retail, this is a meaningful operational change, and one worth getting ahead of.

California has framed the law as an effort to align its tax system with how commerce happens now, where the “product” is increasingly a login rather than a box on a shelf. Whatever your view of the policy, the takeaway is the same: if software is your business and California is your market, sales and use tax is about to become part of your world.

How Should Software Businesses Prepare for the 2027 Deadline?

The rules take effect January 1, 2027, but the preparation window is now. This change touches both sides of the transaction: vendors who must collect and remit tax, and businesses that buy software for use in California. Here’s where well-prepared companies are focusing:

If You Sell Software or SaaS

• Review your product catalog and determine which offerings are prewritten software versus custom software or exempt services.
• Assess where your customers are located, since sourcing rules generally tie the tax to the California purchaser’s address.
• Update billing systems, tax engines, and invoicing so tax can be calculated and displayed correctly.
• Review customer contracts and terms to confirm how tax will be handled going forward.
• Register for a California sales and use tax permit so you’re authorized to collect and remit before the effective date.

If You Buy Software for Your Business

• Expect that many software subscriptions used in California may cost more once tax applies.
• Review vendor invoices and budgets so the added tax doesn’t surprise your finance team.
• Confirm whether any use tax obligations apply to software you purchase from out-of-state vendors.

Because SB 122 leaves some questions open, particularly around bundled and cloud-based offerings, additional guidance is expected from the CDTFA before the law takes effect. A CPA or tax attorney can help you interpret how the rules apply to your specific products.

How to Register for California Sales and Use Tax

Here’s the good news: while your CPA and tax advisor help you determine what is taxable, CorpNet can handle the filing work that makes compliance real. If the California SaaS sales tax means your business now needs to collect tax, you must register for a sales and use tax permit, and that’s exactly what we do.

Our compliance specialists manage the sales and use tax registration process from start to finish, so virtually no work is required on your part. We handle registration across all 50 states, with live, U.S.-based support and a satisfaction guarantee. Whether you’re a California SaaS startup registering for the first time or an out-of-state software company that now has a California obligation, we make the paperwork fast and painless.

Not sure whether you’ve crossed a state’s threshold? We can also help you understand when you have nexus in a state and walk you through a state-by-state guide to economic nexus.

California SaaS Sales Tax FAQs