California: Governor signs bill to expand taxation of prewritten software
Effective January 1, 2027
Governor Newsom on June 29, 2026, signed a budget trailer bill (S.B. 122) to help finance the recently approved FY 2027 California state budget. The new law substantially expands the sales taxation of prewritten software to include electronically delivered and remotely accessed prewritten software.
Under current California law, the sales and use taxation of prewritten computer software is generally limited to prewritten software that is transferred to the purchaser via tangible media. S.B. 122, effective January 1, 2027, will modify the definition of “tangible personal property” subject to sales and use tax to include the term “digital product and any copyright or patent interests therein;” it then defines “digital product” as prewritten computer software transferred on tangible media, transferred electronically, or accessed remotely.
- While the new law will likely subject most software-as-a-service (SaaS) products to taxation, it does exclude “digital infrastructure” from taxation. Digital infrastructure is defined as a cloud-based service accessed remotely on which a user may deploy their own software on the provider’s digital platform.
- The term “digital product” is also defined to exclude digital assets, digital music, books, movies, and games from the purview of taxation; custom software produced for only a single user also remains nontaxable.
Sales of digitally delivered software will be sourced primarily based on the billing or other address of the purchaser known to the seller; for use tax purposes, remotely accessed software will be sourced based on the physical location of the software user. Finally, the new law will require that if a purchaser exceeds $5 million in electronically delivered or remotely accessed software purchases from a retailer annually, the purchaser will become liable for payment of use tax directly to the state, and the retailer is absolved from collection responsibility.
KPMG observation
While the California approach of defining electronically delivered and remotely accessed software as a digital product differs from that taken in most other states, the outcome as far as what is taxable will likely be similar to other states. The provisions of S.B. 122 that may present the most challenges and questions for taxpayers without further guidance are those concerning the application of the $5 million threshold that relieves the retailer from the requirement to collect tax for sales of digital products. (See sections 12 and 14 of S.B. 122.)
Read a July 2026 report prepared by KPMG LLP