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SB 122 Ready? A plain-English check for California software sellers
From Friday, January 1, 2027, California sales and use tax generally applies to prewritten software, including software as a service (SaaS), under SB 122. SB 122 has no small-seller exemption. A California seller who isn't registered must get a seller's permit, and the local rate follows the buyer's California address. CDTFA's detailed rules are still in draft.
Based on SB 122 (Chapter 23, Statutes of 2026, signed June 29, 2026) and CDTFA's digital products guidance. CDTFA's regulations are drafts and not yet adopted. Last checked against CDTFA on . Sources
Starts Friday, January 1, 2027
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Does SB 122 reach your business?
Six questions, about a minute. Your answers stay in your browser.
What each answer means
- Where your customers are.
- SB 122 taxes sales to buyers with a California address. CDTFA checks the billing address first, then the shipping or delivery address, then the mailing address for the payment method, then the mailing address. With no California address, CDTFA treats the sale as outside California.
- How customers get your software.
- SB 122 calls prewritten software a "digital product" whether it's on a disc, downloaded or "accessed remotely." CDTFA names SaaS as a digital product.
- Same product or built for one client.
- "Prewritten" software is sold to many customers on the same terms, even if it was first built for one client. Custom software is exempt.
- Services.
- A digital product that "represents a service" is exempt when the work is mainly done by people and started after the customer asked. The exemption doesn't cover the right to use software running in the cloud.
- Registration.
- California sellers who aren't registered must get a seller's permit. Out-of-state sellers "engaged in business" in California register for a Certificate of Registration – Use Tax.
- Plans that cross January 1.
- Under CDTFA's draft rule, payments for subscription periods before January 1, 2027 aren't taxed, and payments for periods on or after that date are. The rule isn't final.
Is your software a "digital product"?
Taxed from January 1, 2027
- Prewritten software on a disc or drive
- Prewritten software downloaded or sent electronically
- Prewritten software accessed remotely, including SaaS, through a web browser or a program interface
Not a digital product under SB 122
- Digital assets
- Audio works and audiovisual works
- Books
- Digital infrastructure: platforms where customers create, deploy, scale or run their own software (IaaS, PaaS)
- Video game products
- Visual works
Exempt
- Custom software
- Software sold with reproduction and distribution rights
- Digital products bought only for use outside California
- A digital product that represents a service done mainly by people, started after the customer asked. This does not include SaaS.
What's law now, and what's still draft
CDTFA is writing emergency regulations to explain SB 122. Until they're adopted, keep these two columns apart.
Digital products are taxable from January 1, 2027.
SaaS is a digital product, and the service exemption doesn't cover it.
No small-seller exemption. The only dollar threshold is $5 million of sales to one buyer in a year. Above it, the seller may be relieved and the buyer reports the use tax directly.
The local rate follows the buyer's California address, billing address first.
California sellers who aren't registered need a seller's permit.
Plans that cross January 1: payments for periods before January 1, 2027 aren't taxed; payments for periods on or after it are.
A one-time sale on December 15, 2026, with access starting that day, isn't taxed, even if paid in installments.
Sales tax vs. use tax: sales tax applies only when a California place of business takes part in the sale with "genuine physical human interaction." Online orders without that fall under use tax, which a seller engaged in business in California must still collect.
The direct-payment and waiver process: CDTFA says its guide will be updated when that's available.
Your SB 122 readiness checklist
What CDTFA hasn't decided yet
CDTFA released a discussion paper and draft regulations on September 1, 2026, held a public meeting on September 10, and closed written comments on September 24. As of September 29, 2026, no regulation has been adopted, and CDTFA still lists the topic as informal rulemaking. The drafts propose new Regulations 1502.2, 1600, 1600.1, 1600.2 and 1600.3. We'll update this page when CDTFA adopts them.
Once adopted, SB 122 lets these emergency regulations stay in effect for two years and be readopted.
Get an email when CDTFA adopts the SB 122 rules
FAQ
Common questions
Does SB 122 apply to SaaS?
Yes. From January 1, 2027, SB 122 treats prewritten software as a digital product, including software "accessed remotely." CDTFA names SaaS as a digital product. The exemption for services done by people doesn't cover the right to use software running in the cloud.
When does California start taxing SaaS and software downloads?
Friday, January 1, 2027. SB 122 (Chapter 23, Statutes of 2026) was signed on June 29, 2026. Its digital product sections become operative on January 1, 2027.
Is there a small-seller exemption in SB 122?
No. SB 122 has no small-seller exemption. Its only dollar threshold is $5 million of sales to one buyer in a year. Above that, the seller may be relieved and the buyer reports use tax directly. It shifts the tax to large buyers; it doesn't exempt small sellers.
Is custom software taxed under SB 122?
No. Custom software is exempt. Software first built for one client and then sold to others on the same terms counts as prewritten, and prewritten software is taxed from January 1, 2027. Where your product falls is a question for CDTFA or your tax preparer.
Are services I deliver online taxed?
Not always. A digital product that "represents a service" is exempt when the work is mainly done by people and started after the customer asked. That exemption doesn't cover the right to use your software running in the cloud, so SaaS is still taxed.
Are hosting, IaaS or PaaS taxed under SB 122?
SB 122 says "digital infrastructure" isn't a digital product. That covers platforms where customers create, deploy, scale or run their own software. CDTFA's draft rules also treat IaaS and PaaS this way.
Are ebooks, music, video or games taxed under SB 122?
They aren't digital products under SB 122. The law lists digital assets, audio works, audiovisual works, books, video game products and visual works as outside the definition.
Which sales tax rate do I charge a California customer?
The rate for the buyer's California address. CDTFA checks the billing address first, then the shipping or delivery address, then the payment method's mailing address, then the mailing address. Rates differ by city: in Los Angeles County they run from 10.25% to 11.75% from October 1, 2026.
Do I need a seller's permit to sell software in California?
If you're in California and not registered, yes: CDTFA says you must get a seller's permit. If you're outside California and "engaged in business" here, you register for a Certificate of Registration – Use Tax. One test is over $500,000 of sales into California in a year. Ask CDTFA how digital sales count.
What if a customer paid for an annual plan before January 1, 2027?
Under CDTFA's draft rule, payments for subscription periods before January 1, 2027 aren't taxed, and payments for periods on or after it are. The rule is a draft and isn't final. Check this page again when CDTFA adopts it.
When will CDTFA's SB 122 rules be final?
No date is set. CDTFA released draft regulations on September 1, 2026, and comments closed on September 24. As of September 29, 2026, no regulation has been adopted. We'll update this page when CDTFA acts.
Is this tax advice?
No. This is a free check built from SB 122 and CDTFA's guidance. For your business, contact CDTFA at 1-800-400-7115 or ask your tax preparer. CDTFA recommends getting answers in writing.
Sources
Every fact on this page comes from the statute or from the California Department of Tax and Fee Administration (CDTFA). Last checked on September 29, 2026.
- SB 122, chaptered text (Chapter 23, Statutes of 2026)
- CDTFA, Tax Guide for Retailers and Purchasers of Digital Products: Overview
- CDTFA digital products guide: Definitions
- CDTFA digital products guide: Retailers
- CDTFA Special Notice L-1036 (September 2026)
- CDTFA discussion paper and draft regulations (September 1, 2026)
- CDTFA Business Taxes Committee (rulemaking status)
- CDTFA online registration
- CDTFA Publication 107, Do You Need a California Seller's Permit?
- CDTFA customer service: 1-800-400-7115 (TTY 711)
Prepared by the LedgerLens team from CDTFA's published tables. LedgerLens (ledgerlens.com) is a bank-statement review web app from Edukas Solutions LLC, a California company.
Related
- Selling to customers in Los Angeles County?See every LA County city's rate from October 1, 2026
This page is a free readiness check, not tax advice. It summarizes SB 122 and CDTFA guidance as of the date above and can't tell you what your business owes. CDTFA's regulations are still in draft. For your situation, contact CDTFA at 1-800-400-7115 (TTY 711) or ask your tax preparer.