Starting January 1, 2027, California will generally impose sales and use tax on prewritten software delivered electronically or accessed remotely, including Software as a Service (SaaS). This is a major change: under current California rules, qualifying SaaS where the seller retains possession and control of the software is generally not subject to sales tax.
For SaaS companies selling to California customers, the important question is no longer simply “Is SaaS taxable in California?” It is also “Do we have California nexus and need to register and collect?”
Out-of-state businesses should review their California sales before January 2027, particularly if they are approaching California’s $500,000 economic nexus threshold.
Is SaaS Taxable in California in 2026?
Generally, qualifying SaaS is not currently subject to California sales tax where customers access software remotely, receive no copy of it and the provider retains possession and control.
California’s existing treatment also generally excludes electronically transmitted software from sales tax where no tangible storage media is transferred.
That changes on January 1, 2027.
California enacted SB 122, expanding the definition of taxable tangible personal property to include certain digital products.
The new definition covers prewritten computer software regardless of whether it is transferred on physical media, electronically or accessed remotely. That brings SaaS subscriptions within California’s sales and use tax base.
From January 1, 2027, California will generally tax prewritten SaaS and other prewritten software even when the customer only accesses the software remotely. SaaS providers with California sales should review whether they have nexus and are required to register with the CDTFA and collect California tax.
For many SaaS companies, this means a product that was not taxable in California during 2026 could become taxable overnight on January 1, 2027.
What Software Will California Tax From January 1, 2027?
The change primarily targets prewritten computer software.
This includes software that is:
- Delivered on physical media
- Downloaded electronically
- Electronically transferred
- Accessed remotely
- Provided as SaaS
The state’s own budget materials specifically identified products such as Microsoft 365, Salesforce and Slack as examples of SaaS affected by the proposal that became the new law. This is a significant departure from California’s previous approach, which largely depended on how the software was delivered.
From 2027, remotely accessing prewritten software will no longer, by itself, keep the transaction outside California’s sales tax base.
Does This Mean Every SaaS Company Must Register in California?
No, making SaaS taxable does not automatically mean every software company in the world needs a California sales tax account. A seller still needs to consider sales tax nexus.
For an out-of-state retailer, California’s existing economic nexus rules generally require registration where combined sales of relevant tangible personal property for delivery into California exceed $500,000 during the preceding or current calendar year. Physical presence can also create a registration requirement.
Because SB 122 brings qualifying digital software into the definition of tangible personal property, SaaS businesses that previously had little reason to consider California sales tax may now need to revisit that $500,000 threshold.
Example: Out-of-State SaaS Company
Imagine a Texas SaaS company with:
- No California office
- No California employees
- No other physical presence
- $650,000 of annual SaaS sales to California customers
Historically, its remotely accessed SaaS may have been nontaxable under California’s existing treatment. From January 1, 2027, those subscriptions may become taxable under SB 122.
Because the company’s California sales are also above the relevant economic nexus threshold, it should review its CDTFA registration and collection obligations before the new rules take effect.
What If Your California SaaS Sales Are Below $500,000?
A remote SaaS company with no California physical presence and sales below the applicable economic nexus threshold may not necessarily have a registration obligation simply because SaaS becomes taxable. However, physical nexus is separate from economic nexus.
California considers factors such as having:
- Property in California
- A California office or other place of business
- Certain people operating in the state on the retailer’s behalf
- A California warehouse or other physical presence
when determining whether an out-of-state retailer is engaged in business in the state. So don’t look at the $500,000 figure in isolation.
What About Custom Software?
This is an important distinction. The new law focuses on prewritten computer software rather than genuinely custom software prepared to the special order of a customer.
Custom software remains outside the new taxable digital-product treatment, subject to the detailed rules and facts of the transaction.
SaaS companies offering a mixture of:
- Standard subscriptions
- Custom development
- Implementation
- Consulting
- Support
should therefore review how their contracts and invoices distinguish those different components.
Are Netflix, Spotify and eBooks Now Taxable Too?
The legislation isn’t a blanket tax on everything digital.
During development of the measure, California specifically distinguished the software change from consumer digital content such as:
- Digital audio
- Digital audiovisual works
- Digital books
- Digital video games
The state’s budget materials specifically cited services and products such as Netflix, Spotify and Kindle books as outside the proposal’s scope.
The central target of this change is prewritten software, including SaaS, not every online subscription or digital product.
How Much Sales Tax Will SaaS Companies Need to Charge?
California’s statewide sales and use tax rate is currently 7.25%, but local district taxes can increase the rate depending on the transaction and applicable sourcing rules. This means SaaS companies shouldn’t simply configure a blanket 7.25% California rate.
Businesses need systems capable of determining the appropriate tax based on the applicable California sourcing and district tax rules.
For companies with thousands of subscriptions, getting those systems ready before January 1, 2027 will be important.
What Should SaaS Companies Do Before January 1, 2027?
Businesses selling SaaS or prewritten software to California customers should use the remainder of 2026 to review their position.
Start by checking:
- What are you selling?
Determine whether your product qualifies as prewritten software, SaaS, custom software or another digital product.
- How much are you selling into California?
Review current and projected California revenue.
- Do you have physical nexus?
Consider employees, offices, servers, property and other California activity.
- Will you need a California registration?
If nexus exists and you will make taxable sales, registration may be required.
- Can your billing system calculate California sales tax?
Review Stripe, Shopify, Chargebee or other billing and subscription platforms before the effective date.
- Are your contracts and invoices ready?
Clearly distinguish SaaS, custom development and other services where appropriate.
Waiting until the first invoice of January 2027 could leave very little time to correct problems.
Why This Change Matters for International SaaS Companies
The new rules aren’t relevant only to US software businesses. A SaaS company based in:
- The UK
- Canada
- Australia
- Europe
- Elsewhere outside the US
can still potentially create California economic nexus.
You do not need to be incorporated in California, or even in the United States, for US state sales tax rules to become relevant. For international SaaS businesses with substantial California customers, 2026 is therefore a particularly important year for nexus reviews.
FAQs
Is SaaS subject to California sales tax in 2026?
Qualifying remotely accessed SaaS is generally not taxable under California’s existing treatment where no tangible personal property is transferred and the provider retains possession and control.
When will California start taxing SaaS?
January 1, 2027. SB 122 expands California sales and use tax to qualifying prewritten software delivered electronically or accessed remotely, including SaaS.
What is California’s economic nexus threshold?
California currently uses a $500,000 sales threshold for qualifying out-of-state retailers, measured using the preceding or current calendar year. Physical presence can create nexus separately.
Will every SaaS business need a California sales tax permit?
No, taxability and nexus are separate questions. A SaaS company needs to determine whether its product is taxable and whether its activities create a California registration and collection obligation.
Does the new California tax apply to international SaaS companies?
Potentially, yes. A foreign business can create California sales tax nexus even without being incorporated or headquartered in the United States.
Final Thoughts
January 1, 2027 represents one of the biggest recent changes to California sales tax for the software industry. For years, SaaS businesses could generally provide remotely accessed software to California customers without charging California sales tax. SB 122 fundamentally changes that treatment for prewritten software.
The key takeaway is if you sell SaaS to California customers, don’t wait until January 2027 to determine whether you need to collect sales tax. Review your California nexus, product taxability and registration position during 2026 so you’re ready when the new rules take effect.
RJM Tax Exemption can help SaaS and software businesses determine whether they meet California’s sales tax nexus requirements, complete CDTFA registration where required, and prepare for their ongoing filing obligations from January 1, 2027.
