The change
California Governor Gavin Newsom signed SB 122 in June 2026. Effective January 1, 2027, the state applies sales and use tax to prewritten software and SaaS, regardless of how it is delivered: downloaded, streamed, or accessed in a browser.
The rate is California's standard sales tax stack: 7.25% state base plus local district taxes. Depending on the buyer's address, that totals 7.25% to about 10.75%. Most metro areas will see 8-10%.
California was the last major holdout. The state taxed software on physical media but not software in the cloud. That distinction is gone. California now joins more than 20 states that tax SaaS in some form, and the state projects roughly $2 billion a year in combined revenue from the change.
What is taxable
Prewritten software: anything built once and sold repeatedly. That covers essentially every B2B SaaS product on the market, including CRM, sales enablement tools, and AI-powered prospecting platforms.
Custom software prepared for a single customer stays exempt. Modifications to prewritten software count as custom only for the modification portion, and only if charges are separately stated.
Infrastructure services like AWS and GCP compute also remain outside the tax base. Digital books, music, video, and crypto are excluded.
Impact on buyers
If your company spends $2 million a year on software, expect $160,000 to $200,000 in new tax expense. That buys you nothing.
This stacks on vendor price increases. If your Salesforce contract already carries a 7% annual uplift and the state adds 9%, your renewal invoice is up 16-17% for the same seats. Only half of that is negotiable.
There is no input credit or refund mechanism. The tax comes straight out of gross margin.
Bundling matters. If you buy a platform that includes software access plus implementation, support, and managed services, the California Department of Tax and Fee Administration applies a true object test to determine what you are really buying. A bundle billed as one line item is taxable in full. The same deal with services broken out separately may only be taxable on the subscription portion.
Ask your top vendors now how they plan to invoice in January, because their answer sets your number.
The $5 million threshold
If your digital product purchases from one vendor exceed $5 million in a calendar year, the compliance burden shifts. The vendor stops collecting, and you self-assess and remit use tax directly.
That means you need a use tax direct payment permit, you issue an exemption certificate to the vendor, and you report local use tax broken out by each county or city where first use occurs. Most finance teams do not have that process in place, and the penalty for missing it accrues quietly.
Impact on vendors
SB 122 did not create a new nexus threshold. It made software sales count toward the existing one: $500,000 in California sales for a remote seller.
Many B2B companies that have never registered with the California Department of Tax and Fee Administration are about to become registrants. That includes out-of-state SaaS vendors with meaningful California revenue, even without an office or staff in the state.
Vendors will need to update billing systems, tax compliance workflows, and pricing before January 1, 2027. Customers may see effective price increases of 8% to 10% in many locations.
For global SaaS vendors with sales teams in ANZ but significant U.S. bookings exposure, this means changing quote-to-cash workflows across regions. California is no longer a tax-free SaaS market.
Sourcing and compliance
Remote sales are sourced to the purchaser's known California address, in priority order: billing address, then shipping or delivery address, then the address on the payment instrument, then mailing address.
Place of use is where the person accessing the software is located. There is a presumption of California use for anything bought outside the state and used in it within 90 days.
The California Department of Tax and Fee Administration has indicated it may build a purchaser-side exemption certificate for multi-state use and is considering apportionment methods based on user or device location, similar to Massachusetts. For purchases under $5 million, the department has floated either a real-time certificate or a back-end refund mechanism.
What to do now
Buyers: Review your 2027 software budget. Filter to what is taxable. Multiply by your district rate. Ask your major vendors how they plan to handle invoicing and bundling under SB 122. If you are close to the $5 million threshold with any single vendor, start building the use tax compliance process now.
Vendors: Register with the California Department of Tax and Fee Administration if you hit the $500,000 nexus threshold. Update your billing and tax systems. Decide how you will handle bundled services. Communicate pricing changes to customers before renewal season.
California is now aligned with more than 20 other states taxing SaaS. Vendors competing on price will need to revisit net pricing, renewal clauses, and tax gross-up language across enterprise contracts.
Base $120k, OTE $180k just got more expensive to deliver in California.