California Software and SaaS Sales Tax 2027: CDTFA Emergency Regulations Update

Key Points: California’s new sales tax on prewritten software and SaaS under SB 122 takes effect January 1, 2027, and CDTFA’s September 10 interested parties meeting revealed several open questions that could shape how the rules apply, including when taxability is triggered, how sourcing works across multiple addresses, how the $5 million direct pay threshold will be administered, and how multiple points of use will be handled. The department signaled openness to revising its approach on several of these points, with written comments due September 24, 2026.

 

On September 10, 2026, the California Department of Tax and Fee Administration (CDTFA) held its interested parties meeting on the proposed emergency regulations that would implement Senate Bill 122. SB 122, signed into law on June 29, 2026, extends California sales and use tax to prewritten computer software and software as a service (SaaS) beginning January 1, 2027. It is worth emphasizing at the outset that everything discussed at the meeting remains in draft form. CDTFA circulated a discussion paper with proposed regulatory text on September 1, and the September 10 session was part of the department’s informal process for gathering input. Nothing is final, and the language, examples, and approaches described below could still change before any rules take effect.

What California Software Sales Tax Means for 2027

SB 122 amends the definition of tangible personal property in the Revenue and Taxation Code to include digital products, and it defines a digital product to include prewritten computer software whether it is transferred on physical media, delivered electronically, or accessed remotely. Custom software remains exempt, and several categories are carved out of the new tax, including digital assets, digital audio and audiovisual works, digital books, digital infrastructure, digital video game products, and streamed content. Most provisions become operative January 1, 2027. The bill authorizes CDTFA to adopt emergency regulations, which can remain in effect for two years and be readopted while the department completes regular rulemaking.

The proposed package includes eight regulations: amendments to Regulations 1502 (data processing), 1507 (technology transfer agreements), and 1699.6 (use tax direct payment permits), together with new Regulations 1502.2 (custom computer software), 1600 (application of tax to digital products), 1600.1 (the tax liability threshold), 1600.2 (multiple points of use), and 1600.3 (products purchased solely for use outside California). The draft regulations are written to be operative January 1, 2027, and CDTFA repeatedly stressed that the package is intended to apply prospectively. The full text of the proposed regulations is available on the CDTFA website.

Key Themes from CDTFA’s September 2026 Meeting

Most of the substantive comment focused on new Regulation 1600 and on questions of timing, sourcing, the five-million-dollar threshold, and multiple points of use. The recurring themes are summarized below. In each case, CDTFA was responding to draft language and, in several instances, signaled that it was open to revising its approach.

Timing Rules: What Counts as a 2027 Transaction

CDTFA confirmed that, under the draft, taxability would hinge on when the right to open, view, access, download, or otherwise use a digital product first occurs, not on when payment is made. If the right to access begins before January 1, 2027, the transaction would be treated under prior law even if payments continue into 2027. A multi-year fixed contract with access beginning in 2026, for example, would not become taxable simply because installments are paid in later years, while a renewal of a term that expires after 2027 would be treated as a new, taxable agreement. Several commenters raised due process and retroactivity concerns about pre-2027 agreements. CDTFA responded that it does not intend a retroactive result and agreed to review the treatment of fixed-price contracts, pointing to the examples in proposed Regulation 1600(f).

Sourcing Rules: California’s Address Hierarchy for Digital Products

The statute sets a priority order for sourcing that looks first to the purchaser’s billing address, then to the shipping or delivery address, then to the address of the payment instrument, and finally to the mailing address. Because this order differs from the approach several other states use, commenters raised concerns about competing state claims and audit risk, particularly where a seller has more than one address on file for a customer over time. CDTFA clarified that a seller may take the transaction at face value. If an out-of-state address is provided, that address controls and the seller is relieved, while the purchaser remains responsible for use tax on any actual California use. The waterfall to prior addresses applies only where the purchaser provides no address at all. CDTFA indicated it would consider adding examples so that the treatment is applied consistently in audits.

The Five-Million-Dollar Threshold and Direct Pay Permits

Under the draft, once a seller’s sales of digital products to a single purchaser exceed $5 million in a calendar year, liability shifts to the purchaser, who must obtain a use tax direct payment permit and self-assess, unless a waiver applies. Commenters asked CDTFA to let companies that expect to exceed the threshold elect direct pay from the first dollar, and to permit blanket exemption certificates. CDTFA noted that it is constrained by the statute in several respects but said it is considering these suggestions.

Multiple Points of Use: Still an Open Question

As drafted, the multiple points of use regulation would require the seller to collect tax on the California-use percentage at the time of the transaction. Practitioners on both the buyer and seller side argued that this is difficult to administer, because purchasers rather than sellers typically know the use split, billing systems often cannot apply multiple percentages, and the split can change over the life of a contract. Several urged a blanket approach under which the purchaser is fully responsible for remitting use tax on its own usage, similar to Washington and Massachusetts. CDTFA agreed to take the concern back and reconsider.

Open Questions: AI, Bundled Products, and Digital Infrastructure

Nearly every agenda item drew a request for additional examples, particularly on digital infrastructure such as infrastructure and platform as a service, artificial intelligence, the true object test, and bundled transactions. CDTFA acknowledged that these areas need more description and said it plans to publish an industry guide and special notices to address topics that will not be captured in the regulatory text itself.

California Software Sales Tax 2027: What Happens Next

CDTFA outlined the path to January 1, 2027. Written comments on the discussion paper are due September 24, 2026. The department will then evaluate the informal comments and prepare the emergency rulemaking documents, including proposed text and a fiscal impact statement, and expects to post its notice around December 2026 before submitting the package to the Office of Administrative Law (OAL) for review. CDTFA’s stated goal is to have the emergency regulation in place for the beginning of 2027. Because emergency regulations are valid for two years, the department will still need to certify them through regular rulemaking, which is when the standard public comment period and any request for a public hearing would occur.

One practical point for anyone who commented or plans to: CDTFA noted that comments made at the interested parties meeting, or in the coming weeks, do not automatically carry over to the formal rulemaking. Interested parties who want their concerns on the formal record should plan to resubmit during the OAL comment window, which is expected around December.

What California SaaS Businesses Should Do Now

For now, businesses that sell or purchase software or SaaS in California should treat the proposed regulations as a useful preview rather than a settled rulebook. The core dates and concepts are reasonably clear: the new tax is operative January 1, 2027, taxability is expected to turn on when the right to access a product begins, and digital product sales would count toward California’s economic nexus threshold only on and after January 1, 2027. Beyond that, several important mechanics remain open, including how the five-million-dollar threshold and direct pay permits will work in practice, how multiple points of use will be handled, and how the department will treat digital infrastructure, artificial intelligence, bundled offerings, and the true object test.

Companies with meaningful California software or SaaS activity may want to begin mapping their contracts and billing systems to these concepts now, while the details are still being shaped, and to consider whether to submit written comments by the September 24 deadline. Our state and local tax team will continue to monitor the rulemaking and will share further updates as CDTFA releases its formal regulatory package, industry guide, and special notices. As always, please reach out if you would like help assessing how the proposed rules could affect your business. If you have any questions, please contact Troy Bluske or Tracey Stewart at KBF Advisory, LLC (tbluske@kbfadvisory.com or tstewart@kbfadvisory.com).