California starts taxing SaaS on 1 January 2027

From 1 January 2027 California treats prewritten software as tangible personal property, which turns a monthly subscription sold to someone in California into a taxable retail sale. If your sales delivered into California cross $500,000 in a calendar year, you become the party that registers with the state, adds a tax line, collects between 7.25% and 11.25% depending on where the customer sits, and files returns.

That is one state changing one category, with a date on it. None of this is tax advice; it is mechanism and dates.

The bill is signed and the date is fixed

Senate Bill 122 was signed on 29 June 2026, listed by the Governor's office among that day's bills as "SB 122 by the Committee on Budget and Fiscal Review — Taxation" (gov.ca.gov). The California Department of Tax and Fee Administration cites it as Senate Bill No. (SB) 122 (Stats. 2026, ch. 23) and states that the change applies "Beginning January 1, 2027" (CDTFA workshop notice, 7 July 2026).

CDTFA's summary of the bill runs to two clauses. It "expands the definition of 'tangible personal property' to include 'digital products'", and defines a digital product as "prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely."

"Accessed remotely" is where SaaS lands. The statute never says software as a service, and does not need to.

The rule it replaces runs until 31 December 2026: Regulation 1502(f)(1)(D) says the sale of a prewritten program "is not a taxable transaction if the program is transferred by remote telecommunications" and the buyer "does not obtain possession of any tangible personal property", language that has stood since amendments effective 29 January 1999. Section 6016 still defines tangible personal property as what "may be seen, weighed, measured, felt, or touched". Both expire with the year.

The Legislative Analyst's Office costed it at $900 million a year to the General Fund and $1.1 billion to local government, noting "a large share of the newly taxed transactions likely would be business-to-business sales" (LAO). Your B2B customers get no pass for being businesses.

What is in scope is narrower than "digital products" sounds

The label covers less than it suggests. CDTFA states that digital products "do not include a digital asset, digital audio work, digital audiovisual work, digital book, digital infrastructure, digital video game, or digital visual work." Software is the target; media is not. Every row below is from that CDTFA summary.

Two rows will produce arguments. Custom means prepared for a single customer, so a configurable template sold to forty clients is not custom because you configured it. And the human-effort exclusion turns on effort that began after the request.

No small-seller de minimis appears in that list. The only threshold that moves collection responsibility sits at the far end of the scale: CDTFA states that SB 122 "shifts the imposition from sales tax to use tax when the sales of digital products transferred electronically or accessed remotely to a purchaser exceed $5 million in a calendar year." That is one customer buying $5 million a year.

Nexus is a separate question, and it decides whether you care at all

Taxability asks whether California taxes what you sell. Nexus asks whether California can make you collect. Both must be true before anything reaches your invoice, and they move independently — the general shape set out in VAT and sales tax when you sell software rather than repeated here.

California's is a pure dollar test. A retailer is engaged in business in the state if "in the preceding or current calendar year" it "has total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer that exceed $500,000" (CDTFA). No transaction count. Cross it and you must register, collect and file, in "every district in the state, whether or not they have a physical presence in those districts."

That interaction is the whole story: today your SaaS revenue is not a sale of tangible personal property, so it does not count toward the $500,000. From 1 January 2027 it is, and it does.

At an illustrative $49 a month, $500,000 is roughly 850 California customers billed for a full year. Not a large business, and related entities' sales count too.

Being outside the United States removes nothing. The test measures sales delivered into California and never asks where you are incorporated: a UK limited company with 900 California subscribers meets it as a Delaware C-corp does. Non-US status changes only the route, since a merchant of record becomes the seller of record and takes this liability, the trade priced out in the companion post.

The tax is the customer's money, so your only decision is add or absorb

Sales tax is levied on the buyer; you are the collection mechanism, which makes this a pricing question, not a cost question. The statewide base rate is 7.25%, and CDTFA is blunt that it "may be higher than 7.25% depending on the district taxes that apply there", districts adding 0.10% to 2.00% each (rate description). On the current table Los Angeles sits at 9.750%, and rates run to 11.250% in Lancaster and Palmdale (city and county rates).

A $49 monthly plan sold in Los Angeles, as an illustration:

Absorbing has a second defect the single number hides. Because the rate follows the customer's address, your margin on an identical plan varies by city: $3.31 at 7.25%, $4.35 in Los Angeles, $4.96 at 11.25%. You cannot forecast a margin you have handed to a district tax ballot.

Either way, collected tax is not revenue. It lands in your account, sits, and leaves on the filing date: one more wedge between dashboard and balance, as in MRR is not cash. Keep it out of your set-aside arithmetic too: what you reserve monthly against income tax, which a set-aside calculator sizes from expected annual revenue, is a different pot from money held for California.

CDTFA has published no guidance, and that shapes the plan

As of the end of July 2026 there is no special notice on SB 122 (notices index), no digital products regulation among proposed or emergency rules (regulation status), and a law guide still carrying the pre-2027 text. What exists is process: a Digital Products Workshop on 21 July 2026 to identify the code sections "added or amended by Senate Bill No. 122 (Stats. 2026, ch. 23)" needing clarification, and sort them into emergency rulemaking or work that can wait until after 1 January 2027 (Business Taxes Committee), with a discussion paper estimated for August 2026.

Plan against that split. Registration, the tax line and the customer's California address will not change, so build those now. Bundling, exemption certificates and multi-state teams are open questions, and belong in a November conversation with your accountant, not an August guess.

A dated readiness checklist

Copy this and keep the "why" lines; they are what makes each item survive a busy week.

CALIFORNIA SB 122 READINESS - indicative dates

BY 31 AUGUST 2026
[ ] Total 2026 sales delivered to California addresses; project to Dec 2026
and Dec 2027.
Why: the $500,000 test reads the preceding OR current calendar year, so
2026 revenue can pull you in on day one of 2027.
[ ] Classify the product: prewritten and remotely accessed / custom for a
single customer / primarily human effort.
Why: if taxability fails, nothing below applies, at any size.

BY 30 SEPTEMBER 2026
[ ] Decide add or absorb, in writing, with the number attached.
Why: absorbing costs 6.8%-10.1% of each California subscription depending
on the customer's district. Decide once, not per invoice.
[ ] Choose: build tax handling into billing, or move to a merchant of record.
Why: both have lead times; neither is a December switch.

BY 31 OCTOBER 2026
[ ] Register with CDTFA if you expect to cross: seller's permit or
Certificate of Registration - Use Tax.
Why: you cannot lawfully collect a tax you are not registered to collect.
[ ] Store each customer's billing address at signup and renewal.
Why: sourcing follows the address in your records. A customer row with
no state is an unfileable return in April.

BY 30 NOVEMBER 2026
[ ] Checkout and invoice: tax as a separate line, at the customer's rate,
recalculated when the address changes.
Why: reconstructing which rate applied to which sale is the expensive
part of a first filing.
[ ] Email affected California customers: what changes, when, by how much.
Why: a surprise 9.75% on a renewal buys tickets and churn.

BY 15 DECEMBER 2026
[ ] Test one cycle end to end: signup, tax line, invoice, refund.
Why: refunds return tax too. Find that out now.
[ ] Separate ledger for collected tax.
Why: it is not yours and it leaves on a fixed date.

1 JANUARY 2027 Collection starts on sales made on or after this date.
30 APRIL 2027 First return due, for the January-March 2027 quarter.

The only external deadlines there are 1 January 2027, from the statute, and 30 April 2027 for a quarter ending 31 March, under CDTFA's filing dates. The rest is your own runway.

If your invoicing cannot put a tax line, a rate and a jurisdiction on the document, close that gap before January. A free invoice generator with a tax field covers manual invoices; a subscription business needs it computed. That is where the choice between a bookkeeping suite and a tool built around the work stops being cosmetic, the comparison behind a QuickBooks alternative for small studios: one files the accounts after the year, the other gets the tax line right at the moment of sale.

Two states, same date, and no trend to report

Colorado did the same thing three weeks earlier. HB26-1223, signed 4 June 2026, "repeals the downloaded software sales and use tax exemption so that all software that is available for repeated sale and license qualifies as tangible property", for sales on or after 1 January 2027, with custom software and individually negotiated licenses excepted (Colorado General Assembly). Colorado's nexus threshold is $100,000, and a retailer must get a license and start collecting "by the first day of the first month commencing at least 90 days after" crossing it (Colorado Department of Revenue).

Two states is two states. There is no federal rule and no coordinated movement to point at; each state sets its own base and threshold, and the Streamlined Sales Tax remote seller guidance is the nearest thing to a neutral index. What the two share is a shape: an exemption for electronic delivery, written before software was sold by subscription, removed with six months' notice. If your state exempts SaaS today, check it on that state's revenue department site each budget season, not in a vendor's taxability map.

Three things to change this week

Count your California revenue. Year to date for 2026, projected to December, from billing data rather than memory. Everything above depends on whether it approaches $500,000.

Decide add or absorb, and put it in your terms. Absorbing costs 6.8% to 10.1% of every California subscription, and varies by city. If you are adding, the sentence saying prices exclude applicable sales tax belongs in your terms before the next renewal cycle.

Start storing the customer's state. Every signup from today, every renewal, backfilled where you can. Sourcing follows the address in your records, and that is the one thing you cannot reconstruct later.

Worklyn's invoicing puts the jurisdiction and the tax line on the document as you raise it, so when the first California return falls due in April 2027 the record of what was charged, and where, already exists — most of what a founder selling software needs before an accountant takes over.