California Expands Sales and Use Tax to SaaS and Other Digital Products from 2027

Summary

From January 1, 2027, California will generally apply sales and use tax to prewritten software delivered electronically, accessed remotely, or supplied on tangible media. The expanded definition of tangible personal property also encompasses associated copyright and patent interests, materially changing California’s treatment of SaaS and electronically delivered software. [cdtfa.ca.gov], [cdtfa.ca.gov]
The change affects software vendors, SaaS providers, businesses licensing or providing remote access to standardized software, and purchasers. Important exclusions cover custom software, qualifying service products, digital infrastructure, digital books, audiovisual works, audio works, video games, visual works, and certain digital assets. [cdtfa.ca.gov], [cdtfa.ca.gov]
Businesses should identify California users, validate customer addresses and software classifications, update tax engines, and review contracts before January 1, 2027. A separate USD 5 million customer-specific threshold may shift reporting and payment responsibility from the retailer to the purchaser. [cdtfa.ca.gov], [cdtfa.ca.gov]

Article

The California Department of Tax and Fee Administration has issued Special Notice L-1036, Sales and Use Tax Applies to Digital Products Beginning January 1, 2027, explaining a significant expansion of California’s sales and use tax base under Senate Bill 122. From January 1, 2027, the statutory definition of tangible personal property will include qualifying digital products and related copyright or patent interests. [cdtfa.ca.gov], [cdtfa.ca.gov]

A digital product generally includes prewritten computer software transferred on tangible storage media, delivered electronically, or accessed remotely. The definition expressly reaches SaaS arrangements involving a customer’s right to access and use standardized software operating on cloud infrastructure. Software originally developed for a specific customer or for internal use may become prewritten software if subsequently held for general or repeated sale or lease. [cdtfa.ca.gov], [cdtfa.ca.gov]

The legislation does not tax every digitally supplied product or cloud service. Excluded categories include cryptocurrency and certain other digital assets, digital audio and audiovisual works, eBooks, digital video games, digital visual works, and digital infrastructure. The latter includes qualifying infrastructure-as-a-service and platform-as-a-service arrangements that allow customers to create, deploy, scale, or run their own applications. Exemptions also apply to custom software, qualifying digital products representing services other than SaaS, products transferred with reproduction and distribution rights, and products purchased solely for use outside California. [cdtfa.ca.gov], [cdtfa.ca.gov]

For electronically transferred or remotely accessed products, sourcing and customer-location data will be central to determining state, local, and district tax consequences. Businesses should review billing addresses, user-location information, contract terms, exemption documentation, and rules governing multi-location access.

A notable compliance provision applies when a retailer’s aggregate sales of remotely accessed or electronically delivered digital products to the same purchaser exceed USD 5 million. Subject to the detailed conditions, the retailer may be relieved of liability and the purchaser may become responsible for directly reporting use tax, obtaining a direct-payment permit, and providing the retailer with appropriate documentation. The threshold applies to 2027 sales and, from 2028, by reference to the current or preceding calendar year. [cdtfa.ca.gov]

Affected groups should complete product-taxability mapping and systems testing before the January 1, 2027 effective date.

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