California Just Started Taxing SaaS: What Software Sellers Need to Know Before January 1, 2027

If you sell software to customers in California, your pricing is about to change — whether or not you've decided to change it yourself.

On June 29, 2026, Governor Newsom signed SB 122, a budget trailer bill that does something California has resisted for over a decade: it extends the state's sales and use tax to prewritten software, no matter how it's delivered. Boxed software, downloaded software, and — for the first time — SaaS and cloud-based software accessed remotely are all in scope starting January 1, 2027.

For a state that's historically taxed only tangible goods, this is a structural shift, not a rate tweak. And because the rule is new, most of the confusion isn't about the headline (yes, SaaS is now taxable) — it's about the dozen practical questions that come right after: Which of my products actually count? Do I need to update Stripe? What happens to the annual contract I signed in October 2026? This guide walks through what's actually in the law, what's still exempt, and the concrete steps to take before the deadline.

What SB 122 Actually Taxes​

The law applies California's standard sales and use tax — 7.25% at the state level, plus any local district add-ons, so effective rates commonly land between 7.25% and over 10% depending on the customer's city and county — to prewritten computer software, regardless of how it reaches the customer:

• Software on physical media (CDs, USB drives — increasingly rare, but still covered)
• Electronically downloaded software
• Software-as-a-Service and other cloud-based software accessed remotely
• Certain AI-enabled products that are, at their core, standardized software functionality

That last category is worth pausing on. If your AI product is essentially prewritten software wrapped around a model — a dashboard, a workflow tool, a SaaS subscription with AI features bolted on — it's very likely taxable. The law is written around the substance of what's being sold, not the marketing label.

What's Still Exempt​

SB 122 draws a few important lines, and they matter a lot for how you should be thinking about your own product:

• Custom software — code built to a specific customer's specifications remains untaxed. This is the same distinction California has long made for physical custom software; it now carries over to the cloud era.
• Digital infrastructure — defined as a cloud-based service that lets a customer create, deploy, scale, or run their own software on the provider's platform, without managing the underlying hardware. Think AWS, Google Cloud, or Azure. If your product is infrastructure a customer builds on top of, rather than a finished application they use directly, it's explicitly carved out.
• Other digital goods — ebooks, music, movies, video games, and streamed content stay exempt under this bill.
• Cryptocurrency and other digital assets are unaffected.
• Services where the value comes from human effort after purchase (rather than the software itself) are also excluded.

The infrastructure-versus-application distinction is going to be the single most-litigated line in this law. If your product sits anywhere near that boundary — a low-code platform, a developer tool, an API product — it's worth a real conversation with a tax advisor rather than guessing.

Sourcing: Where Is the Sale Actually Happening?​

SB 122 sources remote sales using a hierarchy modeled on the Streamlined Sales Tax Governing Board's rules:

1. Billing address (primary)
2. Shipping or delivery address, if no billing address is available
3. The address associated with the customer's payment instrument
4. The most recent mailing address on file

In practice, this means the tax rate a customer owes is determined by their billing address — not your company's location, and not where your servers happen to sit. If you serve customers across dozens of California cities and counties, each with a slightly different combined rate, your billing system needs to calculate the correct rate per customer automatically. Manually maintaining a rate table is not realistic once you have more than a handful of California customers.

The $5 Million Liability Shift​

One provision that's easy to miss: SB 122 shifts who is responsible for collecting the tax once a seller crosses a revenue threshold.

• For 2027, sellers with more than $5 million in gross receipts from digital product sales shift the collection burden to the purchaser, who must self-assess and remit use tax instead of the seller collecting it at checkout.
• Starting January 1, 2028, that $5 million threshold is evaluated against the current or preceding calendar year.

If you're a small or mid-sized SaaS company, you're very likely still the one collecting and remitting tax at checkout — the shift mostly affects large enterprise software vendors. But if you're approaching that revenue level, it's worth understanding now, since it changes what your invoices and contracts need to say.

Separately, California's existing economic nexus threshold — $500,000 in annual sales into the state — still determines whether you need to register at all. A company with no physical presence in California but enough customers there to cross that threshold is in scope, full stop.

What This Means for Your Pricing and Contracts​

A few practical wrinkles are already showing up in guidance from tax advisors tracking this law:

• Contracts signed before January 1, 2027 that run past that date sit in a genuine gray area. The law doesn't clearly say whether an annual contract signed in October 2026, with a renewal or invoice date in March 2027, becomes taxable mid-term. Review any multi-year or annual agreements with California customers and get advice on how to handle the transition.
• Bundled products — software sold together with services, support, or training — need to be unbundled for tax purposes if the software portion can be separately identified and priced. A fully integrated offering may require a closer look at how much of the price is genuinely "software."
• Exemption certificates matter. If you sell to business customers who would otherwise qualify for a resale or other exemption, you can only skip charging tax if you have a valid certificate on file before the transaction. Without documentation, you're required to charge tax regardless of the buyer's actual status — so start collecting certificates from qualifying B2B customers now, not after the first disputed invoice.
• Customers will notice a new line item. If your pricing has always been quietly tax-inclusive or you've never had to charge California sales tax before, plan a heads-up to major accounts so a sudden tax line doesn't look like a stealth price increase.

A Practical Checklist Before January 1, 2027​

1. Classify your product catalog. For each SKU or plan, decide: prewritten software (taxable), custom software (exempt), or digital infrastructure (exempt). Document your reasoning — you'll want it if the CDTFA ever asks.
2. Check your California nexus. Total your trailing-twelve-month sales into California against the $500,000 economic nexus threshold.
3. Register early. Registrations can be submitted up to 90 days before the effective date — don't wait until late December, when registration volume will spike.
4. Update your billing system to calculate combined state-plus-local rates based on customer billing address, not a flat statewide rate.
5. Collect exemption certificates from any B2B customers who should be tax-exempt, before their first post-2027 invoice.
6. Audit contracts that straddle the effective date and decide how you'll handle the transition for existing annual agreements.
7. Brief your finance and sales teams so account managers aren't caught flat-footed when a customer asks why their renewal invoice looks different.

The Department of Tax and Fee Administration is expected to issue additional administrative guidance before the effective date, so treat this as a moving target through the rest of 2026 — not a box you check once and forget.

Keep Your Books Ready for a New Tax Line​

Adding a new, location-dependent tax to your invoicing is exactly the kind of change that exposes messy bookkeeping — if sales tax collected isn't tracked separately from revenue, reconciling what you owe the state at filing time becomes a scramble. Beancount.io gives you plain-text accounting that's transparent and version-controlled, so a new tax category is just a new account in your ledger, not a mystery to untangle months later. Get started for free and see why developers and finance-savvy founders are switching to plain-text accounting.