Blog · 16 October 2026

California SB 122 SaaS Sales Tax: Digital Products Rules for US CPA Firms Starting 2027

By Keshav Bansal, CA

California SB 122 rewrites how the state taxes SaaS and other digital products for US CPA firms that advise software sellers or California buyers. Senate Bill 122 (Stats. 2026, ch. 23), signed June 29, 2026, expands the Sales and Use Tax Law definition of tangible personal property to include digital products and associated copyright or patent interests beginning January 1, 2027. The California Department of Tax and Fee Administration (CDTFA) Special Notice L-1036 (September 2026) and its Tax Guide for Retailers and Purchasers of Digital Products explain the new base; draft emergency regulations fill in certificates, sourcing and a large-purchaser direct-pay rule.

What counts as a taxable digital product

Under CDTFA’s definitions, a digital product is prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely. That expressly includes Software-as-a-Service (SaaS) where the customer has the right to access and use the provider’s prewritten software on cloud infrastructure or through a thin-client or program interface. Prewritten software is software held or existing for general or repeated sale or lease—even if it started as custom or in-house work, and even if two or more prewritten programs are combined.

CDTFA L-1036 and the definitions page list what is not a digital product, including digital assets such as cryptocurrency, digital audio and audiovisual works, digital books, digital infrastructure (cloud IaaS/PaaS that lets customers create, deploy or run their own applications), digital video game products and digital visual works. Separate exemptions cover custom computer software, digital products that represent a service other than SaaS, products transferred with reproduction and distribution rights, and products purchased solely for use outside California.

Custom software vs common configuration

Custom computer software prepared to the special order of a single customer generally stays nontaxable. Separately stated charges for modifications prepared to the customer’s special order are custom only to the extent of the modification. Baker Tilly (Anna Ferraro, James Levinson and Ryan Galinaitis, Sept. 18, 2026), summarizing CDTFA’s draft emergency regulations, notes that common activities—combining programs, configuration, alterations, reporting capabilities or system adjustments—generally do not convert prewritten software into custom software. CPA firms should push clients to keep invoices that separate taxable prewritten access from truly custom development and from nontaxable human-effort services where an exemption may apply.

When the tax starts: right to access on or after Jan. 1, 2027

The statutory change is effective January 1, 2027. Per Baker Tilly’s summary of the draft regulations, a taxable sale generally occurs when the purchaser obtains the right to access or use the digital product on or after that date, regardless of when payment is made or the product is actually used. Multi-year contracts billed before year-end, renewals and true-ups that confer post-2026 access need a period-by-period review. Stakeholders asked CDTFA for more examples at the Sept. 10, 2026 interested parties meeting; final emergency regulations are expected in December 2026 after Office of Administrative Law review.

MPU certificates and California’s partial seller relief

Draft multiple-points-of-use (MPU) rules would let a purchaser whose digital product is used inside and outside California allocate tax on a reasonable, consistent method (for example user or device counts). Unlike some other states, California’s draft—as Baker Tilly describes it—does not fully relieve the seller: the seller must still collect tax on the California portion. K&L Gates (Jeffrey S. Reed and Devan R. Patrick, Oct. 8, 2026) adds that apportionment based on server location is treated as unreasonable in the proposed MPU regulation. For related certificate mechanics in other contexts, see our sales tax exemption certificates guide.

The $5 million per-vendor direct-pay threshold

L-1036 states that when aggregate gross receipts from sales of digital products by a retailer to a purchaser that are transferred electronically or accessed remotely exceed $5 million in a calendar year or preceding calendar year, tax liability may shift from the retailer to the purchaser. The purchaser may then need a Use Tax Direct Payment Permit and must report the tax directly to CDTFA. Baker Tilly and K&L Gates describe the draft as applying the threshold separately for each vendor to California sales of electronically delivered or remotely accessed products, with collection relief beginning with the transaction that exceeds the threshold (subject to limited exceptions such as insurers and CDTFA waivers). Large buyers should track spend per software vendor before 2027 renewals.

Sourcing: billing address and use tax

For electronically delivered or remotely accessed digital products, L-1036 says the place of sale is generally the customer’s address and the place of use is where the person accessing the product is located. Baker Tilly reports that the draft sourcing hierarchy for electronic/remote sales often begins with the billing address when multiple or no other known addresses exist. Remote-first clients whose billing, headquarters and user locations differ can see California tax charged on a multistate seat count—or a California use tax accrual when a non-California billing address is used in California. Out-of-state sellers engaged in business in California under Revenue and Taxation Code section 6203 must register and collect use tax. For sales-versus-use and remote-seller context, see our sales tax vs use tax and Wayfair guide and the Streamlined remote seller voluntary disclosure guide.

Checklist for US CPA firms

• Sellers: map which SKUs are prewritten SaaS vs custom vs excluded IaaS/PaaS; capture billing and known addresses; plan CDTFA registration before Jan. 1, 2027; configure tax engines for California local and district rates.
• Buyers: budget California tax on 2027 renewals; identify California users; monitor the $5 million per-vendor threshold; document MPU allocations if used.
• Contracts: flag rights to access that begin on or after Jan. 1, 2027 on pre-2027 invoices.
• Books: separate taxable software access from custom work and exempt services so AP, use tax accruals and exemption certificates reconcile.

Where Tax Brew fits

Tax Brew supports US CPA firms with bookkeeping, use tax accrual reviews and sales tax certificate tie-outs while California’s digital-product rules take effect. Your firm keeps the advice and the signature. The first 20 hours are free for qualifying engagements. See our services, or email info@taxbrewglobal.com.

Sources: CDTFA Special Notice L-1036, “Sales and Use Tax Applies to Digital Products Beginning January 1, 2027” (September 2026); CDTFA, Tax Guide for Retailers and Purchasers of Digital Products and Definitions page; Senate Bill 122 (Stats. 2026, ch. 23); Anna Ferraro, James Levinson and Ryan Galinaitis, “What software companies and buyers need to know before California’s 2027 tax shift,” Baker Tilly (Sept. 18, 2026); Jeffrey S. Reed and Devan R. Patrick, “California Expands Sales and Use Tax to SaaS and Certain Digital Products Starting 1 January 2027,” K&L Gates (Oct. 8, 2026). Draft emergency regulations are not final; check current CDTFA guidance. As of 16 October 2026.