California’s New Digital Products Tax: What Software Sellers and Buyers Need to Know Before 2027

Kim Anthony • September 25, 2026

California’s New Digital Products Tax: What Software Sellers and Buyers Need to Know Before 2027

Beginning January 1, 2027, California sales and use tax will generally apply to prewritten software delivered electronically or accessed remotely, including many Software-as-a-Service subscriptions.

CALIFORNIA — If your business sells software, provides access to an online platform or pays for software subscriptions, a tax change belongs on your 2027 planning list.

Under Senate Bill 122, signed into law June 29, 2026, California is expanding the sales and use tax definition of tangible personal property to include certain digital products and associated copyright or patent interests. That means retail sales of covered products in California—and covered products purchased from a retailer for storage, use or other consumption in California—may be taxable beginning January 1, 2027.

The change generally affects sellers of prewritten software, SaaS providers, businesses that license or provide remote access to prewritten software, and the customers who buy those products.

What counts as a digital product?

For this law, a digital product is prewritten computer software delivered on physical storage media, transferred electronically or accessed remotely. Prewritten software is software held for general or repeated sale or lease. It can qualify even if it was originally developed for a particular customer or for a company’s own use. A combination of two or more prewritten programs can also qualify.

What is outside this definition?

The law does not classify every digital purchase as a taxable digital product. The following are excluded from its digital product definition:

Digital assets, such as cryptocurrency
Digital audio works, such as music, spoken recordings and ringtones
Digital audiovisual works, such as movies and videos with sound
Digital books, or eBooks
Digital infrastructure, such as cloud platforms customers use to create, deploy or run their own software applications
Digital video game products
Digital visual works, such as computer-generated artwork

The law also provides exemptions for custom computer software, digital products representing a service other than SaaS, digital products transferred with reproduction and distribution rights, and digital products purchased solely for use outside California. Businesses should review the details of a transaction before treating it as excluded or exempt.

A $5 million rule for certain large purchases

In some transactions, responsibility for paying the tax can shift from the retailer to the purchaser. The rule concerns a retailer’s aggregate gross receipts from digital products sold to the same purchaser that are transferred electronically or accessed remotely.

For 2027, the threshold is more than $5 million in that calendar year. Beginning January 1, 2028, the test looks at whether those receipts exceeded $5 million in the current or preceding calendar year. When the rule applies, the purchaser may need a Use Tax Direct Payment Permit and may have to report and pay the tax directly to the California Department of Tax and Fee Administration (CDTFA).

Location matters for local taxes

For digital products transferred electronically or accessed remotely, the place of sale for local and district tax reporting is generally the customer’s address. The place of use is where the person accessing the product is located. That distinction matters when a company’s billing address and its software users are in different places. CDTFA explains the rules in its Tax Guide for Retailers and Purchasers of Digital Products.

What sellers need to do

California digital product sellers that are not already registered with CDTFA may need to obtain a seller’s permit, file sales and use tax returns, and report and pay tax on taxable retail sales.

Out-of-state sellers that are engaged in business in California under Revenue and Taxation Code section 6203 may need a Certificate of Registration—Use Tax. They would collect and report use tax on covered sales to California consumers and pay it to CDTFA. Registration is available through CDTFA Online Services.

The UBJ takeaway: Software sellers can use the months before January 2027 to review their products, customer locations, invoicing and registration needs. Buyers can review their software agreements and ask vendors how the new tax will appear on invoices. For the definitions, exemptions and reporting rules, start with CDTFA’s digital products tax guide

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