California sales tax on software and SaaS subscriptions starts Jan 1, 2027 (SB 122): what's taxed and what's not

What changed

California is extending its sales tax to software, and the start date is fixed in law. Senate Bill 122 (Stats. 2026, ch. 23), approved June 29, 2026, rewrites what counts as "tangible personal property," the thing California's sales and use tax applies to. The state tax agency, CDTFA, puts it this way in its new tax guide: "Beginning January 1, 2027, sales and use tax generally applies to the retail sale of a digital product." A digital product is "prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely," and CDTFA lists software as a service (SaaS) as one of them. California's statewide sales tax rate is 7.25%, and most areas add district taxes of 0.10% to 2.00% on top, so $100 a year of taxable software would cost at least $7.25 more.

Change 1: downloaded and cloud software stops being tax-free. Until now, California only taxed software sold on a disk or other physical media. The current rule (CDTFA Regulation 1502) says: "The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller's place of business, to or through the purchaser's computer and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction." From January 1, 2027, the amended Revenue and Taxation Code section 6016 says "tangible personal property" means either physical property or "A digital product and any copyright or patent interests associated therewith." The state's Legislative Analyst's Office summed up the old rule in May: the sales tax "does not apply to other sales of software, such as custom software, prewritten downloaded software, or prewritten software accessed remotely." That covers ordinary subscriptions to off-the-shelf software, whether you download it or use it in a browser or app. The law and CDTFA's guide don't name specific products. CDTFA's draft rules do address AI: an AI tool inside a prewritten platform is still not custom software, because its outputs come from "a generalized machine-learning system that is sold or licensed to many customers."

Change 2: what isn't taxed. SB 122 carves out most digital media. CDTFA says digital products do not include digital audio works (music, ringtones, spoken word and audiobooks), digital audiovisual works ("such as movies and videos with sound"), digital books ("such as electronic books"), digital video games played for entertainment, including in-game purchases, digital visual works such as computer-generated art, crypto and other digital assets, and cloud infrastructure and platforms that let a customer run its own software (IaaS and PaaS). Custom software written for a single customer stays exempt. So streaming video, music and audiobook subscriptions, e-books and games are outside the new tax, while productivity, creative, security and other prewritten software is in.

Change 3: subscriptions are taxed period by period, under draft rules. CDTFA released draft emergency regulations on September 1, 2026, held an interested parties meeting on September 10 and took written comments until September 24. They are not final. Draft Regulation 1600 says a subscription "is a continuing sale and purchase. Tax does not apply to payments received for subscription periods prior to January 1, 2027. Tax applies to payments received for subscription periods on or after January 1, 2027." Its examples: a one-time license paid on December 15, 2026 that can't be used until January 1, 2027 is taxable; software you get access to on December 15, 2026 but pay for on January 1, 2027 is not; and for a monthly subscription with a 12-month commitment starting December 15, 2026, tax "applies to the amounts charged for the continued right to access the digital product on and after January 1, 2027." Snell & Wilmer reads the draft as taxing an annual plan billed in November 2026 for the months after January 1, so paying ahead in December does not clearly avoid it.

Change 4: where you live decides, and you can owe the tax yourself. For software delivered online, SB 122 sources a sale to the buyer's known California address, starting with the billing address, then the shipping address, the mailing address tied to the payment method, and the mailing address. CDTFA says out-of-state sellers may need to register to collect the tax, and so may marketplace facilitators (app stores and similar platforms) that sell other developers' software. If a seller doesn't collect it, the buyer "may be responsible for reporting and paying use tax directly," including when software "is purchased for use in California from an out-of-state seller who is not registered with us to collect use tax or who is registered with us but did not collect use tax." Software bought outside California and used in the state within 90 days is presumed bought for use in California.

How much money is at stake: when the Governor proposed the tax, the administration estimated it would raise $450 million for the state General Fund and $560 million in local sales tax in 2026-27 (half a year), and $900 million and $1.1 billion a year after that, according to the Legislative Analyst's Office, which called those estimates reasonable. The LAO also noted that a large share of the newly taxed sales will likely be businesses buying software, and that such taxes are often passed on to consumers anyway.

Coverage (checked October 26): accounting and law firms (PwC, Deloitte, EY, RSM, BDO, Snell & Wilmer and the National Law Review) have written it up for businesses, and on X it came up in a political trend on October 18 about the number of tax increases Governor Newsom signed. We found no consumer news story explaining which subscriptions it covers and which it doesn't.

What you can do: check your bills in January for a new tax line on software subscriptions such as office, photo and video editing, antivirus, password managers and AI tools. Make sure your billing address is right, since that decides whether and at what rate you're taxed. Don't expect prepaying an annual plan in December to dodge it: under the draft rule, tax applies to subscription periods from January 1, 2027. If you buy from a seller that doesn't charge California tax, you may owe use tax yourself. Before you cancel anything, note that streaming video, music, audiobooks, e-books and entertainment games aren't covered.

Who it affects

Anyone who buys prewritten software for use in California, whether downloaded, used in a browser or app, or sold as a subscription (SaaS), including people and businesses. Sales are sourced to the buyer's California address. Streaming video, music, audiobooks, e-books, entertainment games, crypto and cloud infrastructure services are excluded, and so is custom software.

Quick answers

When does California start taxing software subscriptions?

January 1, 2027. Senate Bill 122 (Stats. 2026, ch. 23), approved June 29, 2026, adds digital products to what California's sales and use tax applies to. CDTFA's guide says "Beginning January 1, 2027, sales and use tax generally applies to the retail sale of a digital product."

What software is taxed?

Prewritten (off-the-shelf) computer software, whether it's on a disk, downloaded, or "accessed remotely," including software as a service (SaaS). Until now, California taxed software only when it came on physical media. Custom software written for a single customer stays exempt.

Are Netflix-style streaming, Spotify, audiobooks, e-books and games taxed?

No. SB 122 excludes digital audio works (music, ringtones, spoken word, audiobooks), digital audiovisual works such as movies and videos, digital books, digital video games played for entertainment (including in-game purchases), digital art, crypto and other digital assets, and cloud infrastructure and platform services (IaaS and PaaS).

How much is the tax?

California's statewide sales tax rate is 7.25%, and most areas add district taxes of 0.10% to 2.00%. At 7.25%, a $100-a-year software subscription costs $7.25 more.

Can I avoid it by prepaying an annual plan in December?

Probably not for subscriptions. CDTFA's draft Regulation 1600 says a subscription is a continuing sale and "Tax applies to payments received for subscription periods on or after January 1, 2027." The draft is not final. In its examples, software you get access to in December 2026 under a one-time sale is not taxed, but a license paid in December that can't be used until January 1, 2027 is.

What if the seller doesn't charge California tax?

You may owe use tax yourself. CDTFA says buyers may be responsible for reporting and paying use tax when software is bought for use in California from an out-of-state seller that isn't registered to collect it or didn't collect it. Software bought outside the state and used in California within 90 days is presumed bought for use in California.

How much will the tax raise?

The administration estimated $900 million a year for the state General Fund and $1.1 billion a year in local sales tax once it's in effect for a full year (2027-28 onward), according to the Legislative Analyst's Office.

Source

Detected on the California pricing page: https://cdtfa.ca.gov/industry/retailers-and-purchasers-of-digital-products/. Always check the source; this summary is not legal or financial advice.

Other sources:

• CDTFA: Tax Guide for Retailers and Purchasers of Digital Products
• CDTFA: Digital products definitions (what is and isn't taxed)
• CDTFA: Purchasers (use tax, 90-day rule)
• CDTFA Special Notice L-1036: New Sales and Use Tax on Digital Products
• CDTFA discussion paper and draft emergency regulations (Sep 1, 2026)
• SB 122 chaptered text (Stats. 2026, ch. 23)
• CDTFA Regulation 1502 (current rule: downloaded software not taxed)
• Legislative Analyst's Office: The 2026-27 Budget: Sales Tax on Prewritten Software (May 16, 2026)
• CDTFA: California sales and use tax rates
• Snell & Wilmer: CDTFA proposes emergency regulations for California's new tax on digital products (Sep 15, 2026)

Provenance: detected in our Oct 26 snapshot of the California pricing page. Excerpts marked "Quoted from the documents" come from the sources linked above.