California SB 122 Is Now Law: What SaaS Companies Need to Know About the State's New Digital Sales Tax

For years, California has been one of the few major states where Software as a Service (SaaS) has generally not been subject to sales tax. That is now changing.

The California Legislature approved SB 122, and Governor Gavin Newsom signed the bill into law on June 29, 2026. The legislation significantly expands the state's definition of tangible personal property to include many digital products, including downloaded software and remotely accessed prewritten software (SaaS).

The new rules take effect January 1, 2027, impacting thousands of software companies doing business in California.

Here's what businesses should know as they prepare for the changes.

What's Changing?

Today, California generally taxes software delivered on physical media but not prewritten software delivered electronically or accessed remotely as SaaS.

SB 122 changes that by expanding the definition of tangible personal property (TPP) to include certain digital products beginning January 1, 2027. Specifically, the law defines a digital product as prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely.

This means both downloaded software and remotely accessed prewritten software, including many traditional cloud-based SaaS offerings, will generally become subject to California sales and use tax beginning January 1, 2027.

How Does the Law Define SaaS?

One of the main aspects of the legislation is that it specifically addresses software accessed remotely.

The law defines "accessed remotely" as prewritten computer software residing on the vendor's server or a third-party server that customers access using a password, digital code, or another means.

In other words, the legislation isn't simply taxing downloaded software. It also encompasses traditional cloud-based SaaS offerings that many businesses rely on every day.

While the law does not specifically use the term "Software as a Service" throughout its definitions, its definition of remotely accessed prewritten software captures many common SaaS business models.

Downloaded Software Would Also Become Taxable

The new law also eliminates much of the historical distinction between software delivered electronically and software delivered on physical media.

Beginning January 1, 2027, businesses selling electronically downloaded prewritten software into California will generally be required to collect and remit California sales tax, assuming the transaction is otherwise taxable.

Not Every Digital Product Is Included

Although much of the attention surrounding SB 122 has focused on SaaS, the law is broader than that. At the same time, it specifically excludes several types of digital products from the new definition, including:

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

The legislation also continues to distinguish custom software from prewritten software, meaning not every software transaction will necessarily be taxable.

In addition, the law provides an exemption for certain digital products that represent services primarily involving human effort performed after the customer requests the service. However, that exemption does not apply to the right to use or access software running on cloud infrastructure.

What About Economic Nexus?

California's economic nexus threshold currently requires remote sellers with more than $500,000 in sales of tangible personal property into the state to register and collect sales tax.

Because SaaS has generally not been considered tangible personal property, many SaaS companies have not counted those revenues toward the threshold.

Beginning January 1, 2027, that changes. Because SB 122 expands the definition of tangible personal property to include taxable digital products, sales of taxable SaaS and downloaded software can become part of the sales used to determine whether a business meets California's economic nexus threshold.

Importantly, businesses should not assume that historical SaaS revenue must be retroactively included in their economic nexus calculations. The new provisions become operative January 1, 2027.

Companies should evaluate their California sales and nexus position based on the new rules well before the effective date.

Other Services Could Also Be Affected

The law also addresses services associated with software.

Charges for maintenance, installation, and configuration related to software may require additional review depending on how those services are provided and whether they are sold in connection with taxable digital products.

This means businesses may need to review not only their software subscriptions, but also the professional services and other charges bundled with them.

Companies should evaluate their specific offerings rather than assuming that every service associated with SaaS will receive the same tax treatment.

New Sourcing Rules Add Another Layer of Complexity

SB 122 also establishes new sourcing rules for digital products transferred electronically or accessed remotely.

For remote sales, the law generally looks to the purchaser's known address in California, with a hierarchy that includes the purchaser's billing address, shipping or delivery address, payment-related mailing address, and other mailing address maintained in the seller's records. The law also provides rules for determining the place of use when a digital product is accessed remotely.

For SaaS companies with customers, users, or locations across multiple states, these sourcing rules will be an important part of preparing for compliance.

Questions We're Still Waiting to Have Answered

Although SB 122 is now law, many implementation questions still remain.

The California Department of Tax and Fee Administration (CDTFA) is working on guidance and rulemaking related to the new digital product provisions. Additional guidance will be important for businesses as they prepare for the January 1, 2027 effective date.

Businesses should be watching for clarification on issues such as:

• How bundled SaaS offerings will be taxed
• Sourcing rules for businesses with users in multiple states
• Treatment of enterprise licenses with multiple users
• Documentation requirements for exempt transactions
• Registration and implementation requirements
• Additional clarification around excluded digital infrastructure services
• How businesses should apply the new rules to complex software and service arrangements

Until additional guidance is available, businesses should avoid making assumptions about how every transaction will be treated.

What Businesses Should Do Now

With the law now enacted and an effective date of January 1, 2027, now is the time to begin evaluating its impact.

Companies should consider:

• Reviewing whether their products fall within the law's definition of a taxable digital product.
• Determining whether California sales could create or change economic nexus beginning in 2027.
• Reviewing how their software, services, and bundled offerings are structured and billed.
• Evaluating sourcing and customer-location data to determine where digital products are subject to tax.
• Assessing whether billing systems, tax engines, and ERP platforms are prepared to tax SaaS and downloaded software.
• Monitoring CDTFA guidance as additional implementation details become available.

Preparing now will make implementation significantly easier when the new rules take effect.

Final Thoughts

SB 122 represents one of the most significant changes to California's sales tax laws for software companies in decades. By expanding the definition of tangible personal property to include many digital products, including SaaS and downloaded software, the law creates new sales tax and compliance obligations for businesses selling software into California.

The law is no longer something businesses need to plan for "if" it passes. California's new digital product tax rules are coming January 1, 2027.

For SaaS and software companies, the time to evaluate product taxability, nexus, sourcing, customer data, and systems is now. Understanding your potential exposure and addressing compliance requirements before the effective date can help avoid last-minute challenges when the new rules take effect.