California will tax SaaS and other prewritten software starting January 1, 2027. Senate Bill 122, signed June 29, 2026, expands the sales and use tax to "digital products": prewritten computer software that is transferred on physical media, transferred electronically, or accessed remotely. Until December 31, 2026, California generally does not tax SaaS, so the change affects every SaaS company with California customers.
This guide covers what changes, what stays exempt, how California decides where a sale happens, and what to do before the date. It is educational information, not tax advice. The California Department of Tax and Fee Administration (CDTFA) is still publishing guidance and regulations, so confirm current rules with CDTFA. We checked its digital products guide on October 9, 2026.
California SaaS sales tax at a glance
| Question | Answer |
|---|---|
| Is SaaS taxable in California? | Yes, from January 1, 2027. Generally not before then |
| Law | Senate Bill 122, signed June 29, 2026 |
| What is taxable | Prewritten software, including SaaS, however delivered: media, download or remote access |
| What stays exempt | Custom software prepared for a single customer, plus the digital categories listed below |
| Rate | The 7.25% statewide base rate plus district taxes, based on where the sale is sourced |
| B2B vs B2C | Both are covered. We found no blanket business-to-business exemption |
| Large-buyer rule | Above $5 million a year from one seller, the buyer reports use tax directly and the seller is relieved |
| Seller registration | Register with CDTFA for a seller's permit or a use tax Certificate of Registration |
What changes on January 1, 2027?
Today, California applies sales tax to tangible personal property. CDTFA has treated software delivered by remote telecommunication as outside the tax, under Regulation 1502, and that is why SaaS has not been taxed.
SB 122 changes the definition. CDTFA's guide says sales and use tax applies to the retail sale of a digital product, and any copyright or patent interests that come with it, sold in California or bought from a retailer for storage, use or other consumption in California. Retailers report and pay sales tax or collect use tax on taxable sales, and purchasers may owe use tax directly when the retailer did not collect it.
What counts as a digital product?
CDTFA defines a digital product as prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely. That covers SaaS: the right to use a provider's prewritten software running on cloud infrastructure from various client devices.
"Prewritten" means software held or existing for general or repeated sale or lease, even if it was first developed for a single customer or for internal use. Custom software, which is prepared to the special order of a single customer, is not a digital product. That includes separately charged modifications made for one customer's specific needs.
What stays exempt?
CDTFA's definitions exclude these categories from digital products:
- Digital assets, such as cryptocurrency
- Digital audio works, such as music, audiobooks and ringtones
- Digital audiovisual works, such as movies and video
- Digital books
- Digital video game products
- Digital visual works, such as computer-generated artwork
- Digital infrastructure, meaning cloud services that let a user create, deploy, scale or run its own software on the provider's platform
Digital infrastructure is the line that matters for infrastructure and platform vendors. Commentators differ on how platform-as-a-service products sit against it, and CDTFA is still working through regulations, so classify each product against CDTFA's definitions rather than by a label.
Products bought solely for use outside California are also exempt, and the buyer can give the seller an exemption certificate.
How does California source a SaaS sale?
For remote sales, California looks for the place of sale using this order:
- The billing address
- The shipping or delivery address
- The mailing address associated with the payment instrument
- The mailing address
If you have no current California address for the customer, CDTFA says to use the most recent address previously provided, in the same order. The place of sale decides which district taxes apply, so the combined rate depends on the customer's location, not yours. To see a combined rate for an address, use our California sales tax calculator.
What is the $5 million rule?
When a retailer's total sales of electronically transferred or remotely accessed digital products to one purchaser go above $5,000,000, the retailer is relieved of sales tax liability and of the duty to collect use tax on the transaction that crosses the line. The purchaser then has to get a Use Tax Direct Payment Permit, give the seller a Use Tax Direct Payment Exemption Certificate, and report and pay the use tax, including local taxes, directly to California.
In 2027 the test is the 2027 calendar year. From 2028 it looks at the current or preceding calendar year, and the amount is adjusted each year for California inflation. This rule matters mainly to sellers with a few very large enterprise customers.
Do digital product sales count toward California nexus?
CDTFA's published economic nexus page still describes a $500,000 threshold based on sales of tangible personal property delivered in California. Its digital products guide says out-of-state retailers may need to register if they are engaged in business in California. We found no CDTFA statement on whether SaaS receipts count toward the $500,000 figure. Do not assume they do not, and do not wait for it to be settled if you already have California customers or a physical presence.
Registration decisions depend on your facts, so check them against CDTFA's guidance for out-of-state retailers and our California sales tax guide.
Questions CDTFA has not finished answering
CDTFA has published a discussion paper and is developing amendments to its regulations ahead of the operative date. Points sellers keep raising include how mixed bundles are treated, how platform products are classified, how multi-state allocation works, and which forms exemption certificates will use. Check CDTFA's digital products guide for updates before you finalize your setup.
What should a SaaS company do before January 1?
- List every product and classify it against CDTFA's definitions: prewritten software, custom, digital infrastructure or an excluded category.
- Count your California customers and find out which billing addresses you hold for each.
- Decide whether you need to register with CDTFA, and start the registration early. Our CDTFA registration timeline for SaaS covers when to start and why not to reactivate an old permit.
- Update billing so tax can be calculated on the correct address and shown on invoices.
- Review contracts with California customers. Say who bears the tax, and how price changes are handled for subscriptions that renew after January 1.
- Flag any customer likely to pass $5 million, and ask whether they have, or plan to get, a Use Tax Direct Payment Permit.
- Keep the pre-2027 treatment documented. Until December 31, 2026, the existing exempt treatment applies.
Kintsugi maps each product to California's rules and tracks nexus across every state where you sell. See Kintsugi for SaaS, and how other states treat SaaS in our SaaS sales tax by state guide. Colorado also starts taxing SaaS that day, and our January 1, 2027 sales tax changes roundup covers the other enacted changes. For the local picture, see Los Angeles SaaS sales tax, and for other digital goods, California sales tax on digital products.
Frequently asked questions
Is SaaS taxable in California?
From January 1, 2027, yes. SB 122 treats prewritten software, including SaaS, as a taxable digital product however it is delivered. Before that date California generally does not tax SaaS.
When does California start taxing SaaS?
January 1, 2027.
Is custom software taxable in California under SB 122?
No. Software prepared to the special order of a single customer is not a digital product, including separately charged modifications for that customer.
Does California tax B2B SaaS?
Yes. We found no business-customer exemption in CDTFA's guidance. The $5 million rule shifts reporting to very large buyers but does not exempt them.
What is the California SaaS tax rate?
The 7.25% statewide base rate plus district taxes, which depend on the place of sale.
Is infrastructure as a service taxable in California?
Digital infrastructure, meaning cloud services that let users create, deploy, scale or run their own software, is excluded from digital products. Check each product against CDTFA's definition.
Do I need to register with CDTFA?
CDTFA says retailers may be required to register, and out-of-state retailers may need to if they are engaged in business in California. Registration is online, for a seller's permit or a use tax Certificate of Registration.
Do existing subscriptions get taxed after January 1?
CDTFA's guides do not describe a carve-out for subscriptions signed before 2027. Plan for tax to apply to charges billed on or after January 1, and confirm with CDTFA or your adviser.
Sources
- California Department of Tax and Fee Administration, Tax guide for retailers and purchasers of digital products, checked October 9, 2026.
- California Department of Tax and Fee Administration, Definitions, Retailers and Purchasers, checked October 9, 2026.
- California Department of Tax and Fee Administration, Sales and use tax applies to digital products beginning January 1, 2027, September 3, 2026.
- California Department of Tax and Fee Administration, Wayfair and economic nexus.
- California Legislature, SB 122.
- California Department of Tax and Fee Administration, Regulation 1502, the rule in effect until December 31, 2026.
