California Will Now Impose Sales Tax on Most Software and SAAS

On Monday, the Governor signed the new California budget which includes this sales tax change that will impact almost every consumer (business, nonprofit or individual).

Effective January 1, 2027, Sales Taxation of Digital Prewritten Software and Software as a Service (SAAS) will apply the California sales tax to sales of digital prewritten software, regardless of how the product is delivered to the purchaser, whether on a disc or physical medium, electronic transmission and local hosting (download), or remote access through the internet, including Software-as-a-Service (SaaS), where the customer accesses the software hosted by the vendor but never takes possession of it.

Note: This new law excludes digital video game products and custom software.

Previously California only imposed sales tax on tangible personal property such as software on a physical media you could touch.

The new law changes the definition of “tangible” property to include a digital product and any copyright or patent interests associated therewith.

“Digital product” means prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely.

Impact on Consumers:

This means individuals, businesses and nonprofits will pay sales tax on downloaded software or software services hosted on another’s website. Many cities in the state have combined state and local taxes in the 9-10% range so every consumer will pay more. For example, I will now pay sales tax on software I download (such as Microsoft office suite, tax software).

Impact on California Software Companies

For California software companies, this means (a) your software will be more expensive than software acquired from other states which makes you less competitive and (b) you are required to collect sales tax beginning January 2027.

Most software companies will now need to collect California sales tax. An exception is that for sales to a customer over $5 million, there is no sales tax collection as the purchaser must self-report use tax to California.