California Expands Sales Tax Base to Include SaaS and Other Digital Products
Although the new rules below do not take effect until January 1, 2027, many technology companies should begin evaluating their potential California sales tax obligations now. For any sales tax questions or compliance help, feel free to contact Brian Doolan at Brian@bdstatetax.com
Effective January 1, 2027, California will significantly expand its sales tax base by redefining "tangible personal property" to include certain digital products, including prewritten software delivered electronically or accessed remotely.
What Is Taxable?
Under the new law, a digital product generally includes prewritten computer software, regardless of how it is provided to the customer:
Transferred on tangible storage media
Transferred electronically
Accessed remotely (Software-as-a-Service or SaaS)
Sourcing Rules
For digital products transferred electronically or accessed remotely, when the transaction is not an in-person sale, the sale is sourced to the purchaser's known California address maintained in the seller's records.
If multiple California addresses are available, the seller generally must use the following order of priority:
Billing address
Shipping or delivery address
Mailing address associated with the payment instrument
Purchaser's mailing address
Notable Exclusions
The definition of a digital product specifically excludes:
Digital assets
Digital audio works
Digital audiovisual works
Digital video game products
Digital visual works
What SaaS Companies Should Do Now
Although the law does not take effect until January 1, 2027, software companies should begin preparing well in advance. Businesses should evaluate how their products are classified, determine where they have California sales tax obligations, review customer address data needed for sourcing, and confirm that their billing and tax automation systems can correctly calculate and collect California sales tax when the new rules become effective. Early planning will help avoid compliance issues and provide sufficient time to update contracts, invoicing processes, and internal systems.