Through December 31, 2026, SaaS is not subject to California sales tax. For sales on or after January 1, 2027, it is. Senate Bill 122, signed June 29, 2026, brought prewritten software into California's definition of tangible personal property.
| SaaS* | |
|---|---|
| Other Digital Goods | |
| Confused? | Talk to us -> |
| Sales | $500,000 |
|---|---|
| Transactions | N/A |
| Physical? |
| California | 7.25% |
|---|---|
| Average Total Rate | 8.85% |
| Local Rates Apply |
* SaaS and other prewritten software become taxable in California for sales on or after January 1, 2027 under SB 122. E-books, streaming audio and video, and video games remain exempt.
California taxes sales of tangible personal property. For decades that only included software when it arrived on physical media, which is why downloads and remotely accessed software—including SaaS—weren't taxable. That changed in 2026. SB 122, signed June 29, brought prewritten software into the definition of tangible personal property, regardless of how it's delivered, for sales on or after January 1, 2027.
The state imposes a base sales tax rate of 7.25%, with many local jurisdictions adding district taxes on top.
Businesses selling into the state need to consider California nexus rules, which determine whether a company has enough of a presence in the state to be responsible for collecting taxes and remitting those funds to the relevant tax authorities. Starting in 2027, software revenue counts toward that threshold for the first time, which means companies that never had a California obligation may pick one up without changing how they sell.
California is a great example of how SaaS sales tax regulations and requirements can change frequently. The state went more than three decades without taxing remotely accessed software, then reversed course in a single budget bill. Misunderstanding tax laws or failing to comply with them can result in fines, penalties, and even legal issues, so staying up-to-date is very important.
California taxes tangible personal property. Through Dec. 31, 2026, that category doesn't include SaaS. Software accessed through a browser rather than delivered on physical media has sat outside the tax since the early 1990s.
SB 122 ends that distinction. For sales on or after January 1, 2027, prewritten software is tangible personal property no matter how it reaches the customer: on a disc, by download, or through remote access.
That's a real simplification, even if it costs sellers money. Today, whether you ship a flash drive alongside the license determines whether the sale is taxable. Starting in 2027 it won't matter—the software is taxable either way.
Infrastructure services stay outside the tax, but the reasoning changes. SB 122 excludes "digital infrastructure," which it defines by what the customer can do: create, deploy, scale, or run their own software. That's a functional test rather than a question of physical components, and it turns on the specific service, not the provider. A major cloud platform sells hundreds of products, and some will qualify while others won't.
Custom software created for a specific client also remains exempt under SB 122, whether delivered digitally or on physical media. One caveat: software originally built to a single customer's order but later held for general or repeated sale counts as prewritten, and becomes taxable in 2027.
Most digital goods remain non-taxable in California even after SB 122.
Software is the exception.
Beginning January 1, 2027, prewritten software is taxable on its own, not only when packaged with something physical. Digital products sold with a physical element, such as a printed manual or storage device, continue to be taxable in their entirety.
Digital-only products like e-books, photographs, and NFTs are not taxed when transferred electronically, and SB 122 doesn't change that. The bill specifically preserves exclusions for e-books, streaming audio and video, video games, and digital assets. California law doesn't classify these as tangible personal property, so they stay outside the scope of sales tax.
Businesses need to be more careful about sales tax on bundles of digital and physical products starting in 2027. When one contract combines taxable software access with exempt services like implementation or training, how you allocate between them matters. Separately stating each charge on the invoice is what makes the exempt portion defensible.
Two provisions catch software companies off guard, and neither is about the tax rate.
The first is nexus. California measures its $500,000 economic nexus threshold on sales of tangible personal property, so software revenue starts counting toward it in 2027. A company comfortably under the threshold today can cross it without changing anything about how it sells.
The second is a collection shift with no real precedent in California. Once your receipts from a single customer pass $5 million in a calendar year, you stop collecting on that relationship and the buyer self-assesses use tax directly with the CDTFA.
Many states tax SaaS and digital goods, creating a complex patchwork of regulations for businesses to stay on top of and work around.
Certain states, like New York and Texas, treat SaaS as taxable, so businesses have to understand and work with differing rules and rates. In states like Colorado, SaaS is non-taxable at a state-level, but certain localities within the state will charge sales tax on software. For companies managing multi-state operations, this variability in regulations can present significant management challenges.
Nonetheless, it’s important to stay informed and proactive to avoid the penalties and pitfalls that can come with non-compliance.
Understanding the concept of nexus is key to remaining compliant. The term “nexus” refers to a business's connection to a state. Once a business has met a nexus criterion in a state, they are required to collect and remit taxes on taxable items. There are two types of nexus:
Understanding how nexus works and tracking where it applies is essential for managing compliance across state lines. Taking these steps helps SaaS companies avoid unnecessary complications and maintain smooth operations in an increasingly digital economy.
Properly navigating sales tax compliance across multiple states can be challenging for SaaS businesses, particularly in states where SaaS is taxable. Following a structured process helps avoid costly errors and potential penalties later on down the line:
These steps, when followed consistently, help businesses remain compliant and avoid potential complications. As you can see, maintaining tax compliance can quickly become overwhelming for firms of any size, especially those currently operating in several states.
Fortunately, Numeral provides a practical solution to these various challenges, offering automated tax rate calculations, simplified reporting, and centralized tracking of state-specific obligations. SaaS companies using Numeral enjoy less administrative hassle and greater assurance in meeting tax compliance.
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Staying compliant with California's tax regulations requires accessing authoritative resources and educational tools. Below are key materials to assist in understanding and fulfilling tax obligations:
In California, SaaS is not taxable through the end of 2026, but becomes taxable for sales on or after January 1, 2027. Businesses that are currently operating in multiple states may encounter different tax requirements and thus should be aware of compliance requirements.
Physical and economic nexus criteria determine where taxes must be collected and paid. These requirements are essential to prevent fines and avoid compliance-related problems, including sales tax audits.
Tax rules are complex and can change frequently, especially as more states introduce taxes on digital goods and services. Regularly reviewing official state resources and tax updates helps businesses stay on top of their current tax obligations.
If your company sells in multiple states, tools like Numeral can help simplify your compliance efforts. Numeral offers features like automated tax calculations and streamlined reporting. Taking advantage of resources like this saves time and reduces the risk of errors, allowing businesses to focus on their growth and success rather than worrying about compliance.
The trusted solution for U.S. sales tax, VAT, and GST compliance, used by 3,500+ global businesses.
