California Will Begin Taxing SaaS in 2027: What Businesses Need to Know
California is making a significant change to the way it taxes software.
Beginning January 1, 2027, California will expand its sales and use tax to include many forms of prewritten software delivered electronically or accessed remotely—including Software as a Service (SaaS).
Governor Gavin Newsom signed Senate Bill 122 (SB 122) into law on June 29, 2026. Historically, California generally did not impose sales tax on software when it was delivered electronically or accessed through the cloud. Under the new law, the method of delivery will no longer exempt software from sales tax.
What Will Be Taxable?
Beginning January 1, 2027, California sales and use tax will generally apply to prewritten computer software, whether it is:
- Downloaded electronically
- Accessed remotely through a web browser or application
- Sold through a recurring SaaS subscription
This means many cloud-based software subscriptions that were previously exempt from California sales tax will become taxable.
What Types of Businesses May Be Affected?
The change reaches far beyond traditional software companies. Any business selling access to prewritten software to California customers should review the taxability of their products.
Businesses should also pay particular attention to bundled offerings that combine software with professional services, implementation, support or other products, as the tax treatment may depend on how those offerings are structured and invoiced.
Additionally, any business in California that is purchasing software will now be responsible for the use tax on that software if they were not charged sales tax by their vendor.
Most importantly, a company does not need to consider itself a “software company” for the new law to potentially apply.
What Should SaaS Companies Do Before 2027?
Businesses selling software or SaaS to customers in California should begin preparing well before the January 1 effective date.
This includes reviewing your product offerings, determining whether they fall within California’s new definition of taxable prewritten software, evaluating your sales tax nexus, and making sure your billing and sales tax systems are prepared to properly calculate tax, and finally, register for sales tax in California.
We’re Here to Help
California’s change represents a significant expansion of its sales tax base and will create new compliance obligations for many businesses.
If your company sells SaaS, electronically delivered software or a technology-enabled service to customers in California, our team can review your offerings and help determine how the new rules apply to your business ahead of the January 1, 2027 effective date.