A California customer will not need a box, a disk or even a download for a software purchase to create a sales-tax issue next year. Starting Jan. 1, 2027, California generally treats access to prewritten software — including software used remotely through the cloud — as a taxable digital product.

The change comes from Senate Bill 122, enacted in June, and is now reflected in guidance from the California Department of Tax and Fee Administration. For businesses, the operational work is less about memorizing a new rate than deciding what the product is, where the customer is treated as located and who is responsible for paying the tax.

SaaS is included, but not every cloud product is

California's new definition of a digital product includes prewritten computer software delivered on physical media, electronically or by remote access. CDTFA's guide expressly treats software as a service, or SaaS, as the right to access and use a provider's prewritten software in the cloud.

Several categories sit outside that definition. The statute and CDTFA guidance exclude digital audio and audiovisual works, digital books, digital video games, digital visual works, certain digital assets such as cryptocurrency and nonfungible tokens, and digital infrastructure products such as infrastructure as a service and platform as a service. Custom computer programs also remain outside the tax when they meet California's custom-software rules.

There is also a service distinction worth watching. A transaction can qualify for a service exclusion when it involves electronic services primarily consisting of human effort begun after the customer requests the service. CDTFA specifically says that simply giving a customer access to prewritten software does not become an exempt service on that basis. A business selling both advisory work and software access therefore cannot assume the same tax treatment applies to every line on the invoice.

For remote software, the address in the seller's records can drive the result

For a digital product transferred electronically or accessed remotely outside an in-person sale, CDTFA says the place of sale is the purchaser's known California address in the seller's records. When the purchaser supplies more than one address during the transaction, the order is billing address, shipping or delivery address, the mailing address tied to the payment instrument and then the purchaser's other mailing address. If no address is supplied during the transaction, the seller applies the same basic hierarchy to the most recent addresses previously provided. If those rules do not identify a California address, the sale is treated as occurring outside California, provided the seller satisfies the law's recordkeeping and reasonable-effort rules.

That makes customer-location data part of the tax system. A SaaS vendor that has historically treated billing addresses as little more than account administration may need them to determine California sales tax and local or district allocation beginning in 2027.

Consider a software company selling a one-year subscription to a California design firm. If the subscription is access to standard prewritten software and the seller's records show a California billing address, the new digital-product rules generally point toward a taxable California transaction. If the seller instead built a genuinely custom program to the purchaser's specifications, the custom-software exclusion may change the result. The tax classification follows the product being sold, not the fact that both transactions are delivered through a browser.

The $5 million rule does not mean smaller SaaS sales are exempt

One of the easiest provisions to misread is a special threshold for very large seller-purchaser relationships. For calendar year 2027, when a retailer's aggregate gross receipts from electronically transferred or remotely accessed digital products to the same purchaser exceed $5 million in that current calendar year, the retailer may be relieved of collection responsibility and the purchaser can become responsible for paying the use tax directly. CDTFA says the purchaser must obtain a direct-payment permit and provide the required certificate to the retailer.

That $5 million figure is not a general exemption for digital-product sales below the threshold. Ordinary taxable SaaS sales can be subject to sales or use tax from the first dollar. The threshold governs a possible shift in who remits the tax in a large customer relationship.

Beginning in 2028, the threshold looks to the current or preceding calendar year. The statutory amount remains $5 million until the first California Consumer Price Index adjustment: CDTFA must calculate that adjustment by Oct. 1, 2031, for the succeeding calendar year, with the result rounded to the nearest $1 million; the calculation then repeats every five years. CDTFA says it is drafting emergency regulations covering the direct-payment process and possible waivers, so that administrative piece is not yet fully settled.

Purchasers can inherit the liability when the seller does not collect

California's use tax is the backstop. A California purchaser can owe the tax when a seller does not collect it, including in situations where the large-purchaser direct-payment rule applies. CDTFA also notes that a purchaser may claim a credit in some cases for legally imposed sales or use tax paid to another state or local jurisdiction, subject to California's rules.

Use outside California can matter as well. CDTFA says a digital product purchased solely for use outside California can qualify for an interstate-commerce exemption. If the product is later put to taxable use in California, the purchaser can become liable for use tax. Digital products bought outside the state and first used in California within 90 days are generally presumed to have been purchased for California use unless the purchaser can rebut that presumption.

What businesses should test before Jan. 1

Sellers should first separate prewritten software, custom development, infrastructure products and human-effort services in their product catalog. The same review should cover customer-address fields, California registration, invoice logic and any tax-engine rules used to calculate local and district taxes.

Purchasers should identify large SaaS and software relationships where vendors may stop collecting because the direct-payment rule applies. They should also check whether their accounts-payable process can recognize uncollected California use tax rather than assuming a tax-free invoice means no tax is due.

The law is enacted and the core digital-product rules are scheduled to operate Jan. 1, 2027. The remaining moving part is administration: CDTFA's emergency regulations for direct payment and waiver procedures are still being developed. Businesses implementing the change now can classify products and clean up address data without pretending those unfinished procedures are final.

Sources

Primary sources, last checked Sep. 29, 2026:
California Department of Tax and Fee Administration — Retailers and Purchasers of Digital Products
CDTFA — Digital Products: Definitions
CDTFA — Digital Products: Retailers
CDTFA — Digital Products: Purchasers
California Legislature — SB 122 (Chapter 23, Statutes of 2026)