California’s SB 122: SaaS and Software Sales Tax Is Changing in 2027
For years, many businesses selling Software as a Service (SaaS) and prewritten software into California have operated under rules that generally do not subject these transactions to California sales tax. That changes on January 1, 2027.
With the enactment of California Senate Bill (SB) 122, California will begin applying its sales and use tax to prewritten software, including software delivered electronically and Software as a Service (SaaS). This marks one of the most significant changes to California sales tax in decades and could have a major impact on software companies nationwide.
What Does SB 122 Mean?
Beginning January 1, 2027, California’s 7.25% statewide sales and use tax, plus any applicable local district taxes, will generally apply to:
- Prewritten software delivered electronically
- Software accessed remotely (SaaS)
- Cloud-based software subscriptions
Custom-developed software generally remains outside the scope of the new law, preserving the long-standing distinction between custom and prewritten software.
Why Businesses Should Prepare Now
Although the effective date may seem months away, preparation should begin immediately.
Companies selling software into California should use this time to:
- Determine whether they have California sales tax nexus.
- Review product offerings to identify which products and services are taxable.
- Update billing systems and invoicing processes.
- Register for California sales tax if required.
- Train accounting and customer service teams on the new requirements.
- Review customer contracts and pricing to address the addition of sales tax.
Waiting until the end of 2026 could create unnecessary challenges. Many businesses are expected to register before the law becomes effective, which may increase processing times and create a last-minute rush. Early planning can help avoid compliance issues and provide time to make necessary system updates.
Don’t Wait Until the Deadline
The transition to taxing SaaS and prewritten software represents a significant compliance shift for companies doing business in California. Businesses that prepare now will be in a stronger position to implement the necessary changes smoothly and minimize disruption when the law takes effect.
If your company sells software, SaaS, or digital subscriptions to customers in California, now is the time to evaluate your sales tax obligations—not after January 1, 2027.
How Davis Davis & Harmon Can Help
At Davis Davis & Harmon, we help businesses navigate changing sales tax laws across the country. Whether you need assistance determining nexus, evaluating product taxability, registering with taxing authorities, or updating your compliance strategy, our team is here to help.
Don’t let California’s new rules catch your business off guard. Start preparing today so you’re ready for January 1, 2027.
About Davis Davis & Harmon LLC – Sales Tax Experts: Headquartered in Dallas, Texas, Davis Davis & Harmon LLC – Sales Tax Experts specializes in sales/use tax refund recovery and audit defense. Our team of consultants is comprised of former Big 4 sales tax consultants and state sales tax auditors. Each of our consultants has 15 to 20 years of experience, providing our clients with access to a highly specialized team of sales/use tax professionals. At Davis Davis & Harmon, LLC, we are committed to maintaining the highest standards in our talent pool. We work hard to meet our clients’ needs by ensuring that you view our firm as an extension of your company and a member of your team.