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

• California will expand its sales and use tax base from January 1, 2027 to cover certain digital products, including electronically delivered software and Software-as-a-Service (SaaS).
• The California Department of Tax and Fee Administration (CDTFA) released draft emergency regulations addressing key areas including digital infrastructure, custom software, multiple points of use, interstate and foreign commerce, and direct-payment permits.
• Businesses selling or purchasing digital products in California should review their tax determination, contractual, sourcing and systems processes ahead of the 2027 effective date, while monitoring further CDTFA guidance and possible changes to the draft regulations.

Extended Article

California is preparing for a significant expansion of its sales and use tax regime affecting the digital economy. Effective January 1, 2027, certain digital products will become subject to California sales and use tax, including electronically delivered software and SaaS. The development represents an important change for a state historically notable for its comparatively limited taxation of electronically delivered products and services.

As part of the implementation process, the California Department of Tax and Fee Administration (CDTFA) released an initial draft of emergency regulations on September 1, 2026. The draft regulatory package provides more detail on how the expanded tax base is expected to operate in practice. PwC notes that final comments on the draft were due September 24, 2026.

The regulatory package is broad. It includes amendments or proposed rules concerning computer programs and data processing, custom computer software, technology transfer agreements and the general application of sales and use tax to digital products. Separate proposed regulations address the tax-liability threshold for digital products, products purchased for multiple points of use, digital products used outside California or in interstate or foreign commerce, and use-tax direct-payment permits.

An important area for businesses operating across multiple jurisdictions is the treatment of multiple points of use. The rules will be particularly relevant where software, cloud solutions or other digital products are purchased centrally but accessed or used by employees or operations in multiple states. Similarly, the proposed treatment of products purchased exclusively for use outside California or in interstate or foreign commerce will require close attention to sourcing, documentation and tax-system configuration.

PwC emphasizes that the regulatory framework is still developing. CDTFA has received significant feedback since publication of the drafts, and the regulations may therefore be revised or supplemented by additional guidance before the January 1, 2027 implementation date.

For businesses, the change goes beyond tax-rate configuration. Sellers of SaaS, software and other affected digital products should consider product taxability classifications, customer location and sourcing data, exemption processes, invoicing, contractual tax clauses and ERP or tax-engine configuration. Purchasers should similarly assess whether existing procurement and use-location data are sufficient to support the correct tax treatment.

Source and further reading:

• US Indirect tax quarterly digest 3rd quarter 2026: PwC [pwc.com]
• California Department of Tax and Fee Administration: Tax Guide for Retailers and Purchasers of Digital Products [cdtfa.ca.gov]
• California Department of Tax and Fee Administration: Sales and Use Tax Applies to Digital Products Beginning January 1, 2027 [cdtfa.ca.gov]
• California Expands Sales and Use Tax to SaaS and Certain Digital Products Starting January 1, 2027: K&L Gates [klgates.com]