California has enacted a significant change to its sales and use tax rules affecting software and technology companies. On June 29, 2026, Governor Gavin Newsom signed Senate Bill 122 ("SB 122") into law. Beginning January 1, 2027, California will expand its definition of taxable tangible personal property to include certain "digital products," including prewritten computer software delivered electronically or accessed remotely.

This is a major change for Software-as-a-Service ("SaaS") companies, as many SaaS products that historically have not been subject to California sales tax may become taxable.

Out-of-State and Foreign Companies May Be Affected
The new rules are not limited to California companies. Under California's economic nexus rules, an out-of-state retailer generally may have a sales and use tax collection obligation when its applicable sales into California exceed $500,000 during the current or preceding calendar year, even if it has no California office or employees.

Because SB 122 expands taxable tangible personal property to include qualifying digital products, both U.S. and foreign software companies selling to California customers may become subject to California sales tax compliance requirements.

Not All Digital Products Are Taxable
SB 122 contains several important exclusions, including certain custom software, digital infrastructure, digital books, digital audio and audiovisual works, digital visual works, and digital video games.

The distinction is important. A traditional SaaS product may be taxable, while certain cloud infrastructure, custom software, or other digital offerings may remain outside the new rules.
Determining whether a particular product or service constitutes a taxable "digital product," excluded "digital infrastructure," custom software, or a nontaxable service can require careful analysis of the technology and how the product is provided and used.

Software and technology companies selling to California customers should review their California sales tax position before January 1, 2027, including whether they exceed the $500,000 economic nexus threshold, how their products and services should be classified, and whether their billing and sales tax systems need to be updated.

Businesses in the software, SaaS, cloud computing, and broader technology industries should consult with their tax advisors to determine how SB 122 applies to their specific products and business models.