TL;DR

• SB 122 ends California's nontaxable treatment of electronically delivered prewritten software and reclassifies it as taxable tangible personal property, regardless of how you deliver it.

• The change takes effect January 1, 2027, applying to SaaS subscriptions, downloaded software, and cloud-accessed prewritten software.

• The rule hits any SaaS seller with California nexus: physical presence in the state, or out-of-state sellers crossing the $500,000 economic nexus threshold. SB 122 does not create a new nexus test, but it makes software sales count toward the existing one — so many SaaS companies will be registering with California for the first time.

• Before January 1, 2027, run a nexus review covering physical presence and the $500K threshold, register with the CDTFA, classify your products as prewritten or exempt, and set up tax calculation keyed to purchaser location for district rates.

Why SB 122 Landed on Your Desk

If you run finance at a SaaS company with California customers, SB 122 creates a new collection obligation you did not have before. The bill ends California's nontaxable treatment of electronically delivered prewritten software, which means subscriptions your California buyers previously paid tax-free may now be taxable. For most SaaS companies with California nexus — physical presence in the state, or sales above the $500,000 economic nexus threshold — SB 122 creates a collection obligation that starts January 1, 2027. Register and start collecting in time, or the uncollected tax becomes your liability. Uncollected tax remains your liability as the seller. California's CDTFA can assess back taxes for three years from the return due date under Revenue & Taxation Code §6487, and that window stretches to eight years for sellers who never registered or filed. A SaaS company newly obligated under SB 122 with no California registration falls squarely into the eight-year exposure, and that assessment covers tax you never charged your customers plus interest and penalties. The single fact that orients everything else is the effective date. The nontaxable treatment of electronically delivered prewritten software ends January 1, 2027, and every compliance step below works backward from that deadline.

What SB 122 Actually Changes

SB 122 reclassifies prewritten software as taxable tangible personal property regardless of how you deliver it. Before the bill, California did not tax prewritten software delivered electronically. If a customer downloaded your software or accessed it through the cloud, no tangible personal property changed hands under the state's reading, so no sales tax applied. Physical media triggered tax; a download did not. That distinction is gone. Whether a customer streams your product from the cloud, downloads it, or subscribes to a hosted version, the underlying software is the same taxable good. You can read the operative language in the enrolled bill text and the revenue projections in the Legislative Analyst's Office fiscal analysis. The change is narrow, and reading it as wider than it is will cost you accuracy. SB 122 touches prewritten software and the SaaS built on it. It does not pull other digital goods into the tax base. Digital books, streamed media, and digital audio and visual works stay untaxed because they sit outside the bill's definition of a digital product, which covers prewritten software only. The bill adds one product category to the tax base rather than opening the entire digital economy to sales tax. "Prewritten" carries all the weight here. California treats software as prewritten when you sell it in a standardized form to more than one customer, which describes almost every SaaS product on the market. Custom software written for a single buyer sits entirely outside the rule. Custom modifications to prewritten software sit outside it only to the extent of the modification, which in practice means stating the modification charge as its own line item. The question you now have to answer for each product is not how you ship it, but whether you built it once and sold it many times. For most SaaS companies with California customers, that answer is yes. Your subscription product is prewritten software delivered over the cloud, and after January 1, 2027, it is taxable tangible personal property under California law. The nontaxable treatment you relied on to skip California sales tax on electronic delivery ends on that date.

What Is Taxable Under the New Rule

Three product categories fall inside SB 122 once the new rule takes effect. SaaS subscriptions billed to California customers, downloaded prewritten software, and cloud-accessed prewritten software all become taxable sales of tangible personal property. If you license a standardized product that any customer could buy off the shelf, it is in scope regardless of how the customer receives it. California previously drew the line at delivery method, leaving anything sent electronically untaxed. SB 122 moves the line to the nature of the product. Prewritten status is now what determines taxability, and delivery method is irrelevant. A prewritten application streamed through a browser, downloaded to a laptop, or accessed through an API carries the same tax treatment, because the delivery mechanism no longer controls the outcome. One mechanic changes who remits the tax on your largest accounts. When a single California customer's annual digital product purchases from you exceed $5 million, the remittance obligation shifts to that buyer. The customer self-assesses use tax on those transactions and remits it directly to the state, relieving you of collection on that relationship. The exact mechanics — including whether the buyer must hold a direct payment permit — are expected to be settled through CDTFA guidance, so track which accounts cross that line and confirm the rules before you stop collecting. The $5M threshold applies per customer, per seller, and per year, and is indexed for inflation beginning in 2031, so it will not cover most of your invoices. For a SaaS company with hundreds of California subscribers, the vast majority sit below the line and require you to calculate, collect, and remit in the ordinary way. Flag the handful of enterprise accounts that clear $5 million and treat them as an exception in your billing system, then run every other California sale through standard collection.

What Remains Exempt

SB 122 pulls prewritten software into the tax base, but it leaves several digital-product categories untouched. If you sell any of the following, those revenue lines stay outside California sales tax even after January 1, 2027. Custom software remains exempt outright. Software built to the special order of a single customer is not a digital product under the bill, with no separate-statement requirement attached. Custom modifications to prewritten software are treated as custom only to the extent of the modification, so itemize the modification charge on the invoice as its own line. If you bundle custom modification work into a single line item alongside prewritten components, California can tax the full amount. Digital goods stay outside the tax base as a category. That includes video games, digital audio and audiovisual works, digital books, and streamed media. SB 122's definition of a digital product covers prewritten software only, and it does not reach these products. Cryptocurrency and digital assets remain outside the rule. A token, a coin, or a tokenized asset does not become taxable prewritten software because you deliver it electronically. Infrastructure services are also outside the scope. Compute and storage sold as IaaS — the core AWS, Google Cloud Platform, and Microsoft Azure infrastructure model — is not prewritten software under the new classification. PaaS is not addressed in the bill's carve-outs, so treat platform-layer products as an open classification question pending CDTFA guidance, and classify by product rather than vendor, since large cloud providers also sell offerings that look like prewritten software. The taxable trigger is a licensed software product, not the underlying infrastructure your customer runs it on. The exemptions above protect standalone products cleanly. Mixed offerings are where finance teams lose exempt treatment by accident. The statute is silent on how bundled transactions are taxed, so separate statement is a starting position rather than a guarantee: when you sell a taxable prewritten SaaS product alongside an exempt component in one contract, line-item separation on the invoice is the defensible baseline, but do not assume it protects the exempt portion on its own. A single blended charge invites California to tax the whole bundle, so audit your billing before the effective date, split every mixed contract into distinct, separately stated lines, and confirm the treatment as CDTFA guidance lands.

California Sales Tax Rates for SaaS

Your California SaaS tax bill starts at a 7.25% statewide base rate, then climbs based on where your customer sits. District taxes add local percentages on top, and the combined rate reaches as high as 11.25% in the highest-tax jurisdictions. A subscription sold to a customer in a low-tax county carries a very different rate than the same subscription sold into a city with multiple stacked district taxes. That variation forces you to source tax by purchaser location, not by a single statewide number. Two customers on identical plans can owe different amounts because they live in different districts.

To estimate exposure for a specific customer, run their address through the CDTFA rate lookup, which returns the exact combined rate for any California location. Estimating with the 7.25% base alone understates your collection obligation for any customer in a district-tax area, which covers most of the state.

Nexus: When These Rules Apply to You

SB 122 changes what California taxes, not who owes tax. Two questions get conflated the moment a finance lead reads the bill. Whether you sell taxable software is a scope question, and whether you have to collect California tax at all is a nexus question. SB 122 answers the first one. California's existing nexus rules — physical presence in the state, or the $500,000 economic nexus threshold for remote sellers — answer the second. California sets economic nexus at $500,000 in sales of tangible personal property into the state during the current or preceding calendar year, with no transaction-count prong. Physical presence — an office, employees, or property in California — creates nexus on its own at any sales volume. If you already hold a California registration because you sell taxable goods or have people in the state, SB 122 extends that existing obligation to prewritten software you previously treated as nontaxable. If you are a pure SaaS seller, the threshold math itself changes: before 2027, electronically delivered software was not tangible personal property, so that revenue did not count toward the $500,000 threshold at all. Once SB 122 reclassifies it, it counts — which means many SaaS companies that never had a California obligation will be registering for the first time. If you have no physical presence in California and your California sales sit below $500,000, SB 122 gives you nothing new to do. The bill creates no separate nexus test and no lower threshold for software sellers. A remote company at $300,000 in California revenue with no in-state presence has no collection duty before or after January 1, 2027, regardless of how much of that revenue comes from prewritten software. A company with a California office or employees, by contrast, must collect on its taxable California sales from dollar one — the $500,000 threshold never enters into it. That distinction matters most for companies sitting near the line. The threshold counts sales of tangible personal property — including nontaxable sales such as resale, but not sales of items that were never tangible personal property to begin with. Electronically delivered software fell into that second bucket before 2027, so a SaaS company's subscription revenue starts counting toward the $500,000 threshold only once SB 122 reclassifies it. One open question is whether 2026 software revenue counts for the preceding-calendar-year test when measuring a 2027 obligation; the statute does not say, so watch for CDTFA guidance and get ahead of registration if you are near the line. Run your nexus review first. Confirm whether you have physical presence in California, then whether you are above or below $500,000 in California sales, and move to product classification once either trigger applies to you.

Compliance Steps Before January 1, 2027

Work these seven steps in order. Each one gates the next, so skipping ahead leaves gaps that surface as uncollected liability later.

1. Run a nexus review

Check for physical presence first: an office, employees, or property in California creates nexus at any sales volume. Then total your California sales for the current and preceding calendar year and compare against $500,000, remembering that from 2027 your prewritten software sales count as tangible personal property for that test. If either trigger applies, you have a collection obligation under SB 122. If neither does, you have no obligation and no registration to file.

2. Register with the CDTFA

Register through the CDTFA online portal if you are not already registered in California. In-state sellers register for a seller's permit; remote sellers register for a Certificate of Registration—Use Tax. Do this early. CDTFA needs processing time to assign your account before the January 1, 2027 effective date.

3. Audit your product taxonomy

Classify every offering as prewritten software or an exempt category, and flag any bundle that mixes both. Prewritten software is taxable regardless of how you deliver it, so a subscription, a download, and a cloud-accessed product all land in scope. Custom modifications, IaaS, digital media, and similar carve-outs stay exempt.

4. Update billing and invoicing

Configure your invoices to separately state exempt custom modifications made to prewritten software. Custom work bundled into a single taxable line item risks being taxed in full. A separate line item on the invoice protects the exempt portion.

5. Set up tax calculation keyed to purchaser location

Configure your billing system to source each transaction to the customer's California jurisdiction so district taxes apply correctly. The statute sources remote sales through a fixed address hierarchy — billing address first, then shipping or delivery address, then the address tied to the payment instrument, then any other known mailing address — so clean customer address data determines both taxability and rate. The combined rate ranges from the 7.25% state base up to 11.25% depending on where the buyer sits. A single statewide rate will under- or over-collect on most transactions.

6. Flag customers above $5M in annual purchases

Identify any single California customer whose annual digital product purchases from you exceed $5 million. On those accounts, remittance shifts to the buyer through use-tax self-assessment, and you stop collecting — confirm the mechanics against CDTFA guidance before turning collection off. Miss the flag and you collect tax the buyer was supposed to remit directly.

7. Determine your filing cadence

CDTFA assigns your filing frequency after registration based on your expected liability volume, so you cannot set it yourself. Higher-volume sellers file monthly, and smaller ones file quarterly or annually. Register early enough to receive your assigned schedule before collection begins on January 1, 2027.

How Taxwire Handles This for You

Once you have run the checklist, you face a build-versus-buy decision. Building the California workflow in-house means registering with the CDTFA, maintaining district rate tables keyed to every purchaser jurisdiction, flagging $5M self-remittance accounts, and filing on whatever cadence the CDTFA assigns. Taxwire operates all of it on your behalf. Taxwire runs the nexus review across physical presence and the $500,000 threshold, handles CDTFA registration, keys tax calculation to purchaser location so district rates apply correctly, and manages filing on your assigned schedule. The difference from a software-only tool is that Taxwire's in-house tax team owns the ongoing work. Your finance team keeps the classification decisions it needs to own, and Taxwire carries the registration and filing mechanics rather than handing them back to you as a configuration problem. The build path makes sense if you already have a sales tax function staffed for multi-state filing. If you do not, hiring a senior tax professional to own California still requires software on top of their salary. Taxwire's managed-service model covers both. Most clients reach full compliance within one week of onboarding. Start with a nexus review to confirm whether SB 122 creates a collection obligation for your business, then decide how you want to meet it.

FAQs

Do B2B sales get any exemption?

No, SB 122 includes no blanket exemption for business-to-business software sales. You can skip collecting only when you hold a valid certificate on file from the buyer: a resale certificate, an exemption certificate for a qualifying exempt entity, or a certificate that the digital product is purchased solely for use outside California or in interstate or foreign commerce — an exemption SB 122 adds alongside CDTFA authority to approve alternative methods that fairly allocate tax to in-state use. A California customer using your SaaS to run their own in-state operations owes tax on that subscription, and you must collect it. Keep certificates current, because an expired or missing certificate leaves you liable for the uncollected amount.

Is there a small-seller safe harbor under SB 122?

No, SB 122 adds no de minimis rule that shields low-volume sellers from the new taxability. For remote sellers, the only threshold that governs your obligation is California's general economic nexus standard of $500,000 in sales into the state during the current or preceding calendar year. If you sit below that figure with no physical presence in California, you have no collection duty regardless of SB 122. Physical presence — an office, employees, or property in the state — creates the obligation at any sales volume. Once either trigger applies, the reclassification of prewritten software applies to your California sales in full.

What if we sell a bundle of taxable SaaS and exempt IaaS?

Taxability follows each component of the bundle rather than the bundle as a whole. The statute confirms separate line-item treatment for custom software modifications to prewritten software, but it does not settle whether that same rule extends as a general principle to mixed SaaS and IaaS packages. Do not assume a general separately-stated rule protects your exempt IaaS elements without confirmation. Consult CDTFA or qualified tax counsel on sourcing rules for mixed transactions before you build your invoicing logic around this assumption.

When does CDTFA expect the first filing?

CDTFA assigns your filing frequency after you register, basing the cadence on your expected liability volume rather than a fixed schedule for all sellers. Register early enough that you receive your assigned frequency and any related instructions before the January 1, 2027 effective date. High-volume sellers often land on monthly filing, while smaller obligations file quarterly or annually. Missing your first assigned deadline triggers penalties, so confirm the schedule in writing once CDTFA processes your permit.