Gov. Gavin Newsom on June 29, 2026, signed Senate Bill 122 (SB 122, Chapter 23), a budget trailer bill that, among other provisions, extends California’s sales and use tax to “digital products,” defined as prewritten computer software transferred electronically or accessed remotely. For the first time, software-as-a-service (SaaS) and other remotely accessed software will be subject to California sales tax, effective January 1, 2027. With this change, California joins more than 20 states that tax SaaS in some form.

• Custom Software Exemption: California’s existing exemption for custom computer software (software “prepared to the special order of a single customer”) is preserved. However, the exemption does not apply to software “held or existing for general or repeated sale or lease, even if initially developed on a custom basis.”
• Out-of-State Use Exemption: Digital products purchased solely for use outside California or in interstate or foreign commerce are exempt. Sellers may accept a certificate attesting to out-of-state use. However, unlike some other states that tax SaaS, the California legislation does not contain a method for allocating use on a multistate basis.

A good article which outlines some additional exemptions can be found at: https://thompsontax.com/california-sb-122-software-saas-sales-tax/

This change ends the tax advantage of subscription over perpetual licenses.

thompsontax.com

California SB 122: New Sales Tax on Software and SaaS Starting 2027

California SB 122 expands sales tax to SaaS and prewritten software effective January 1, 2027. Learn how it affects vendors, purchasers, and cloud-based software users.