California just did something it had resisted for years. On June 29, 2026, Governor Newsom signed SB 122, a 2026-27 budget bill that extends the state's sales and use tax to prewritten software and SaaS for the first time. The tax takes effect January 1, 2027.
That's about six months of runway. For a company selling software into the largest economy in the country, this is a new obligation on revenue that has always been tax-free. The state expects it to raise roughly $2 billion a year, so the enforcement attention will match the number.
Here's what's changing, who it hits, and the part most companies will underestimate.
Starting January 1, 2027, California's full sales tax applies to prewritten software and SaaS sold into the state. That's the 7.25% state rate plus local district taxes, which vary by where the buyer is located.
Newly taxable:
Still exempt:
The dividing line is prewritten versus custom. Sell the same product to many customers and it's prewritten, which means taxable. Build something from scratch for one client and it stays exempt. Configurable platforms and software bundled with services sit in the gray area, and those are exactly the cases worth reviewing early.
Two things have to be true before you owe California anything.
First, your product qualifies (prewritten software or SaaS). Second, you have California nexus. Economic nexus kicks in at more than $500,000 in gross sales to California customers in the current or prior year, and your newly taxable software sales count toward that threshold. Physical nexus comes from having employees, an office, or property in the state.
No California office does not get you off the hook. If your sales cross $500,000, you have an obligation whether or not you've ever registered there. A lot of companies that have never thought about California tax are about to be in scope.
There are good tax engines for this. Anrok, Avalara, and others will calculate the right combined rate for each customer's location and drop it onto the invoice automatically. If you sell into more than a handful of states, you'll want one.
The engine is only as good as what you feed it. It calculates tax on the sales you route through it, at the jurisdictions you've told it you're registered in, for the products you've classified. It does not tell you where you have nexus. It does not decide whether your configurable platform counts as prewritten or custom. It does not know which of your B2B customers hold a valid resale or exemption certificate. Get those inputs wrong and the tool produces clean, automated, incorrect numbers.
That's the work that happens before the software earns its keep: map your California sales against the threshold, classify your catalog against the prewritten line, and register with the CDTFA (you can file up to 90 days before the effective date, and registration volume is going to spike as the deadline gets close).
Two provisions in SB 122 turn compliance into a customer conversation.
The first is a $5 million self-remittance rule. If a single buyer purchases more than $5 million of software from you in a year, that buyer remits the tax directly to the state and you don't collect on that relationship. No other state does this. If you sell to large enterprise accounts, you need to know which relationships cross that line and handle them differently.
The second is exemption certificates. Some B2B buyers, including resellers and qualifying exempt entities, won't owe the tax. But you can only skip charging them if you have a valid California certificate on file. No certificate means you charge them, full stop. Chasing those certificates from your largest accounts in December is a bad time to start.
Then there are the contracts that straddle January 1, 2027. Annual deals signed before the effective date but running past it are an open question the law doesn't cleanly answer. And every customer is about to see a new tax line on their invoice, so the accounts that matter most deserve a heads-up before it shows up.
None of that is a tax-engine setting. It's positioning, contract review, and customer communication, and it's where getting it wrong costs you either money or a relationship.
Treat this as a year-end project and start now.
Six months is enough time to get registered, get billing right, and get customers ready. It's only enough if you start in the first half.
This is the kind of change that sits between finance, tax, and systems, which is where things tend to fall through the cracks. We help software companies figure out where they actually have nexus, classify the catalog, stand up and configure the tax engine correctly, model the revenue impact, and get the certificate and contract work done before the deadline. Your tax advisor sets the position. We make the operation run.
If you sell software into California and you're not sure where you stand, let's map it before the fall rush. Book time with our team.
This post is general information, not tax or legal advice. Talk to your tax advisor about your specific situation.