California is bringing many prewritten software products into its sales and use tax rules from 1 January 2027. If you sell SaaS or digital products to California customers, use the months ahead to classify your products, test your registration position, and prepare your systems for accurate collection and filing.
What changed, and when?
California Senate Bill 122 was signed into law on 29 June 2026. From 1 January 2027, the definition of “tangible personal property” under California’s Sales and Use Tax Law expands to include digital products and associated copyright or patent interests. This applies whether a product is supplied on physical media, transferred electronically, or accessed remotely.
The change may affect sales tax on in-state sales and use tax on products used in California. It covers more than software downloads: access to certain prewritten software through a browser, API, or cloud infrastructure can also be within scope.
The start date applies to subscription periods beginning on or after 1 January 2027, even if the customer signed the contract earlier. Do not assume an existing agreement is automatically outside the new rules.
Who may need to act?
The change is relevant to California-based sellers and out-of-state businesses selling digital products to California customers. For example, a UK or EU SaaS company that sells prewritten software to California users may need to register and collect use tax if it meets California’s “engaged in business” test.
For out-of-state sellers, the important economic-nexus test is more than $500,000 in combined sales of tangible personal property for delivery in California during the current or preceding calendar year. Sales by the retailer and its related persons are included. Because SB 122 brings qualifying digital products within the definition of tangible personal property, those sales can count toward the test from 1 January 2027.
This is not a special $500,000 digital-product threshold. It is California’s broader registration test for out-of-state retailers. Other activities, such as having an agent, property, or a server in California, may also affect whether you are considered engaged in business there.
Check which products are covered
CDTFA defines a covered digital product as prewritten computer software held or existing for general or repeated sale or lease. It can still count as prewritten software if it was first developed for a particular customer or for internal use. A combination of two or more prewritten programs may also be covered.
Potentially taxable products include:
- Prewritten software sold on physical media or electronically.
- Prewritten SaaS and other software accessed remotely.
- Licences or other rights to use prewritten software, including through a browser or API.
Not considered digital products under this law:
- Cryptocurrency and other digital assets.
- Digital audio, such as music, spoken recordings, and ringtones.
- Digital audiovisual works, including movies and videos with sound.
- Digital books and eBooks.
- Digital infrastructure, such as cloud platforms that customers use to create, deploy, or run their own applications.
- Digital video game products and digital visual works, such as computer-generated artwork.
Exemptions include custom computer software other than a basic operation program; certain digital services where the provider’s human effort begins after the customer requests the service; and products purchased solely for use outside California. The human-effort exemption does not cover the right to use prewritten software running on cloud infrastructure or accessed through a browser or API. A right to reproduce or copy a product for distribution to third parties for consideration is also exempt.
Product labels alone may not settle the question. Review what the customer receives and how it is delivered. Keep records of product classifications and the basis for any exemption you apply.
Apply the $500,000 registration test
If you are outside California, review your California sales across the current and preceding calendar year. Include combined sales of tangible personal property for delivery in California by you and your related persons. From 1 January 2027, qualifying digital-product sales can contribute to this total.
If you meet the test, or another California “engaged in business” condition applies, registration may be required even if your business has no California office. California-based sellers not already registered must generally obtain a California seller’s permit. Out-of-state sellers engaged in business in California generally register for a Certificate of Registration. Use Tax.
Registration is only one part of compliance. Sellers may also need to collect and report use tax on California retail sales, file returns, pay amounts due, and maintain supporting records. Check the CDTFA’s digital products guide for retailers and registration information. CDTFA provides online registration through its Online Services portal.
Fix customer address data before you calculate tax
For remote sales, the customer’s known California address in your records generally determines the place of sale and local and district tax allocation. Use the California address provided in this order:
- Billing address.
- Shipping or delivery address.
- Mailing address associated with the payment instrument.
- Mailing address.
If the customer provides no address during the transaction, use the most recent California address on record in the same priority order. If no California address is available, the sale is treated as taking place outside California.
Review your checkout, billing, CRM, and subscription systems so address fields are complete and retained. CDTFA says a seller must make a reasonable effort to obtain accurate and complete address information to qualify for relief when a sale is treated as outside California. Keep evidence of your process and any good-faith exemption certificates. CDTFA says it will provide further details about the required certificate form.
Local and district taxes follow the place of sale. That means you should not apply one assumed statewide rate to every California customer. Configure your tax process to use the customer’s relevant address.
Understand the separate $5 million purchaser rule
The $5 million rule is different from the $500,000 seller registration test. It applies to electronically transferred or remotely accessed digital products sold by one retailer to the same purchaser.
For 2027, if aggregate gross receipts from those sales to that purchaser exceed $5 million in the calendar year, the retailer may be relieved from the obligation to collect use tax or liability to pay sales tax, subject to statutory conditions. From 1 January 2028, the test applies when receipts exceed $5 million in the current or preceding calendar year; the amount is subject to California CPI adjustment.
When the rule applies, the purchaser becomes responsible for reporting and paying use tax on the transaction that takes the total over the threshold and on subsequent qualifying purchases. The purchaser generally must hold a Use Tax Direct Payment
