California SaaS Sales Tax 2027: A Compliance Checklist for Sellers and Buyers

Starting January 1, 2027, California will tax prewritten software no matter how it’s delivered – ending the exemption that SaaS, downloaded software, and cloud-based access have relied on for years. Here’s what’s changing, who it affects, and what to do before enforcement begins.

What SB 122 Changes: SaaS and Cloud Software Now Taxable

SB 122 expands California’s definition of tangible personal property to include “digital products” — prewritten software transferred on physical media, delivered electronically, or accessed remotely. In plain terms: the delivery method no longer matters. If it’s prewritten software, it’s taxable.

Thie new law closes an exemption that businesses have relied on since remote access and cloud delivery became the norm. SaaS subscriptions, downloaded software licenses, and cloud-hosted platforms all move from exempt to taxable on the same date, statewide, with no phase-in period.

Who SB 122 Affects: Sellers, Buyers, and the $5M Threshold

SB 122 creates obligations on both sides of the transaction — and for large purchasers, it can shift the liability entirely.

The $5 million threshold: when a retailer’s digital product sales to a single purchaser exceed $5 million in a calendar year, the tax obligation shifts from the seller to the purchaser. That purchaser must self-assess and remit use tax directly to the CDTFA — regardless of what the seller does.

What’s Exempt Under SB 122

A few categories are explicitly carved out, so it’s worth confirming your product doesn’t fall here before assuming SB 122 applies:

• Custom software built to a customer’s special order
• Separately stated modifications to prewritten software
• Digital books
• Digital music
• Streamed media
• Video games
• Cryptocurrency

SB 122 preparation checklist

Use this as a working list between now and enforcement.

For sellers:

• Confirm California nexus under the expanded digital products definition
• Register in any new jurisdictions where nexus now applies
• Update tax engine/Avalara configuration for SaaS and digital product taxability
• Audit billing systems for correct tax application starting Jan 1, 2027
• Review standard customer contracts and tax clauses
• Identify any single customer approaching the $5M annual threshold

For buyers

• Inventory software contracts with California-based usage
• Flag any single vendor relationship approaching $5M per year
• Confirm with vendors whether they will collect and remit tax
• Build a use-tax self-assessment process for CDTFA
• Loop in procurement and AP on upcoming contract renewals
• Watch for CDTFA guidance and adjust before Jan 1, 2027

Talk to KBF’s SALT Team About Your SB 122 Exposure

Not sure where your business stands?

Every business’s exposure under SB 122 is different depending on your delivery model, customer base, and contract structure. Connect with our team and tell us a bit about your situation. You may also reach out to members of our SALT team: Troy Bluske at tbluske@kbfadvisory.com or Tracey Stewart at tstewart@kbfadvisory.com.